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How to Play Housing as Foreclosures Hit 6-Year Low

According to real estate analysis company RealtyTrac, foreclosures have hit a six-year low in the U.S. Overall, figures are down more than 20% from last year.

That’s a very bullish sign — both for lenders as well as housing stocks.

Consider Wells Fargo (NYSE:WFC), which has roughly one-third of the loan origination market. That’s an amazing market share and triple the No. 2 lender! If you’re curious, that runner-up is JPMorgan Chase (NYSE:JPM) — which also should see a bump as the housing market improves. Both stocks have outperformed the S&P 500 for the past six months, though momentum admittedly has wanted since March.

On the DIY front, home improvement retailer Home Depot (NYSE:HD) — up 20% year-to-date — should continue to do well as more folks spiff up their homes either for a sale or because they just moved in. Another fixer-upper stock is paint giant Sherwin-Williams (NYSE:SHW), which has seen very strong fundamentals lately and has tacked on 23% in 2013 and more than 50% in the last 12 months.

Then of course you have the builders and supply companies. Lumber Liquidators (NYSE:LL) is up 200% in the past 12 months, including a 60% run since Jan. 1 alone. PulteGroup (NYSE:PHM) has gained 130% in the past year, and is up 25% YTD.

The problem with home sales since the Great Recession has been twofold, on each side of the simple supply-and-demand equation.

First, there was a glut of supply driven by foreclosures flooding the market as folks couldn’t pay their bills on complicated mortgages or they lost their jobs as the economy soured.

Then there was a lack of demand thanks to a dearth of qualified buyers as banks grew more discerning and good paying jobs evaporated, as well as a reluctance from the few qualified buyers to buy a house that was plummeting in value.

Improvement in the foreclosure market addresses both sides of the supply-and-demand equation. It stops the market from being flooded with more homes, and props up values to keep prospective homebuyers interested — eager, even, if the market is hot. It also keeps lenders from getting too defensive to protect their loan portfolios, since there’s less bad debt.

According to RealtyTrac, the number of U.S. properties that received a foreclosure filing in April was 5% lower than the previous month and 23% lower than the same time last year. That’s good news all around — for homeowners as well as investors in housing stocks.

Of course, all real estate is local.

Here in the Washington, D.C., metro region, there has been very little sign of a housing downturn ever since 2011 or so. New York City is much the same way, with a huge professional population and an utter lack of quality housing near quality employers.

On the other hand, my in-laws live in northeast Ohio, and the region remains a wasteland for job hunters and homeowners. As RealtyTrac reports:

“One in every 211 housing units in Akron, Ohio, had a foreclosure filing in April, more than four times the national average and the highest foreclosure rate among metropolitan statistical areas with a population of 200,000 or more.”

Keep this in mind before you think about real estate speculation … perhaps housing stocks are a better bet, depending on your market.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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