Could Foreclosure Declines Be a Negative for REITs?

Image of dilapidated houseThe number of home foreclosures in the U.S. fell almost 5% year-over-year, as distressed properties decline on a national basis. But could this actually be bad news for REITs and ETFs that hold them?

From 24/7 Wall Street:

In the month of June, 38,000 U.S. home foreclosures were completed, up 5.1% month over month and down 4.9% from a total of 40,000 in June 2015, according to CoreLogic. The research firm notes that the current foreclosure inventory totals 1% of all homes with a mortgage in the United States, down from 1.3% in June of last year.

The number of U.S. homes currently in some stage of foreclosure totals approximately 375,000, compared with 507,000 in June 2015. That represents a decline in the national foreclosure inventory of 25.9% compared with June a year ago.

According to CoreLogic, the current foreclosure rate of 1% is the same as the October 2007 rate, and the foreclosure inventory has declined every month for the past 56 months. Before the collapse in the housing market in 2007, the average number of foreclosures completed in a month was 21,000.

Also of note in the CoreLogic report is that the highest levels of foreclosures are concentrated in the Mid-Atlantic-Northeast region. New York, New Jersey, D.C., and Maine finished June as #1, #2, #4, and #5 in terms of the largest foreclosed inventory as a percentage of mortgaged properties.

Those areas will likely need quite a bit more time to clear out their still-sizable foreclosure inventory, but that’s not all that concerning.

What is concerning is the fact that national foreclosure rates are now reaching abnormal lows. Why? Not because of higher loan quality. It’s mainly because property ownership is at all-time lows:

Chart: ZeroHedge

It’s not all that surprising that foreclosure rates have fallen so much, when so few people are owning homes. This trend will likely spell trouble for a number of real estate-related stocks like homebuilders, mortgage companies, and developers — as well as the ETFs that hold them.

The Vanguard REIT Index Fund (NYSE:VNQ) rose $0.37 (+0.41%) to $90.85 per share in Tuesday afternoon trading. VNQ has gained nearly 14% year-to-date, almost doubling the performance of the S&P 500 in the same period.


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