The U.S. housing market is a mixed bag so far in 2016. On one hand, the Federal Reserve postponing its second rate hike is keeping mortgage rates low, helping to spur demand for mortgages. And, the gradual improvement in the U.S. economy and the low unemployment rate are additional catalysts. The housing market is generally regarded as healthy, given the trend of rising home values.
On the other hand, tight supply and a wary consumer continue to weigh on the real estate market. Even seven years out from the financial crisis, consumers are still feeling the sting of the Great Recession. Many are choosing to pay down debt and keep cash sitting in bank accounts rather than buy homes.
The housing market got a shot in the arm when Wells Fargo (NYSE: WFC), the nation’s biggest mortgage originator, said industry-wide mortgage volumes will increase 20%-25% this year. That’s a much higher level than the industry originally anticipated, and could be a promising sign that home buyers are coming back into the market.
Is this the time to buy Wells Fargo stock?
Big Banks: Mortgage Volumes Will Soar
Wells Fargo’s prediction aligns fairly closely with what other industry heavy-weights are saying. JP Morgan Chase (NYSE: JPM), the nation’s biggest bank by assets, said mortgage volumes could soar 50% this year.
This marks a reversal over the past few months. Many economists believed that as the Federal Reserve embarked on a tighter monetary policy, it would reduce demand for mortgages.
It could be that the threat of rising rates is actually a direct contributor to the projected increase in mortgage volumes. It’s widely expected that the Federal Reserve will increase the Fed Funds rate, which is the benchmark rate for short-term bank to bank lending. While another rate hike would represent only the second rate increase since 2006, it could spook consumers who have been waiting on the sidelines to buy a home or refinance their mortgage before rates climb even further.
The news couldn’t come at a better time for big banks, which desperately need a growth catalyst. The Fed’s low rate policy has shriveled their net interest margin, the spread between short-term interest paid on deposits and long-term interest earned on loans. For Wells Fargo and JP Morgan Chase, higher mortgage volume is a clear reason for optimism.
Wells Fargo & JP Morgan Chase: High-Quality Blue Chips on Sale
This could be just the right time to buy big the stocks of banks, particularly Wells Fargo and JP Morgan Chase.
Last year, Wells Fargo generated $86 billion of revenue and $23 billion of profit. Revenue and earnings per share increased 2% and 1%, respectively, thanks to cost controls, a strong loan portfolio, and rising deposits.
This has greatly helped Wells Fargo so far in 2016—last quarter, loans grew 7% while deposits rose 4%.
JP Morgan Chase is also off to a good start this year. Last quarter, earnings per share declined 6% year over year, but were stronger than expected. Analysts had forecast $1.26 per share of profit. Total revenue fell 3% year-over-year, to $24.08 billion, but again that beat analyst expectations of $23.40 billion.
If the housing market accelerates faster than anticipated, it will be an additional catalyst and help both big banks return to more significant growth.
In the meantime, these stocks of big banks look very attractive. Wells Fargo and JP Morgan trade for just 11 and 10 times earnings, respectively, and they each offer dividend yields in excess of 3%.
Within the financial sector, there are few companies stronger than Wells Fargo and JP Morgan Chase. Both big banks highly profitable, have strong loan portfolios, and pay hefty dividends to shareholders.
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