Housing market data monitor RealtyTrac reported that November foreclosures decreased by 7.7% from October, marking the biggest decrease since January. The total number of foreclosure filings was 306,627. Although it was nice to see a decrease, any number above 300,000 is very alarming, and this was the ninth month in a row that filings have been above that level. That is why the Obama administration is so adamant about reducing foreclosures, which in turn is most likely the driving factor behind the decrease in foreclosures.
As we all know, the administration issued is Home Affordable Modification Program this Spring. For a long time, the program seemed not to do anything, but homeowners are finally entering the program in large numbers, and it is being reflected in the data. As of the end of November, there were more than 720,000 people enrolled in the three month trial period of the program. Initial feedback from mortgage servicers indicates that roughly 30% of trial participants may go into the full program, although it is still too early to say. The Department of Housing and Urban Development expects roughly 375,000 borrowers to be in the full program by the end of the year. However, the latest report from the government shows that only 31,382 borrowers have been enrolled in the full program since it began. Taking into account the three months the borrowers are on trial, roughly 10% of the participants of the trial have been converted to the full program. At this rate, we will be lucky to get more than 100,000 people in the program before the end of the year unless conversion picks up quickly.
There are a number of potential cracks for borrowers to fall through in the program, including messy paperwork and incompetent mortgage servicing staff, but most importantly job losses, which make the program void since those borrowers cannot be helped. Most of the borrowers who are in the trial period and will ultimately not qualify for the full program will likely fall into foreclosure. Therefore, when the trial periods begin to end, we are likely to begin to see a fresh wave of foreclosure increases. Nevertheless, it is very difficult to get a finger on just exactly how bad the problem is when there are so many measures in place to prevent and delay foreclosures. We suspect that over the next six months or so, foreclosures will continue to average just above 300,000, although there may be months when it dips below.
The good news is that even with such high rates of foreclosure, the government and other factors have encouraged buyers enough to keep the housing market (relatively) in balance. As we all know, near-record low mortgage rates and the nationwide $8,000 tax credit (which was extended until April and now includes existing homeowners) have been quite successful in improving home sales rates through the end of the year. Throughout the year, the supply of existing homes on the market has waffled as record high foreclosures wrestled with improving demand. However, since foreclosures hit the record high back in July, they have been slowly declining, and so has the supply of vacant homes on the market.
The Obama plan may be delaying the problem more so than solving it for the moment, but it could turn out to be a success if it is able to keep families in their homes long enough for the economy to get back on track. Ultimately, unemployment will be the underlying driver of foreclosures from now on, and until that abates, there is only so much the government can do. Nevertheless, as long as there are fewer vacant homes hitting the market than there otherwise would have been, the Obama mortgage plan, combined with the housing tax credit, may just be enough to keep housing demand above the continuing influx of supply. It should be said, however, that we are just barely winning the battle. Any unforeseen speed bumps in the economy could tip the scales the wrong way again.
We stress that the market remains on very loose footing, but some homebuilders are less exposed to such risk than others, one in particular being Ryland Group (NYSE:RYL). Compared to many of the other companies in the industries, Ryland holds a relatively small percentage of its homes in hard hit areas like California, and is well positioned in strong markets like Texas and the Carolinas. As a result, it has been able to improve gross margin and has sidestep many of the excessively large impairment charges miring other homebuilders' earnings. Consequentially, Ryland is in a good position to gain value upon a recovery of the housing market, while comparatively limiting its downside should the market slip again.