Home sales and prices are bouncing back, and mortgage rates are stuck near their lowest levels ever. No wonder loading up on debt is fun again. So is owning bank stocks, especially of institutions whose fortunes rise and fall with the housing market. Between the end of 2010, when mortgage originations bottomed out, and Thursday, the Financial Select Sector SPDR exchange-traded fund (XLF), a reasonable proxy for the banking industry as a whole, eked out a total return of 8.5%, as the stock chart below indicates. Wells Fargo (WFC), the nation’s largest mortgage lender, modestly outperformed the ETF, and two banks that are even more heavily leveraged to housing, First Republic Bank (FRC) and Texas Capital Bancshares (TCBI), put clear daylight between themselves and the ETF.
A recent report from Turner Investments makes the case that there is more to come in the housing recovery and, likewise, that the rally in shares of mortgage lenders has further to run. All those buyers moving out of their parents’ attic or a rented apartment will need new loans, the logic goes, and the low interest rates will encourage existing homeowners to refinance, providing further growth for banks. The report highlights the three stocks above, along with that of EverBank (EVER), an online lender whose stock has done well, too, but has a trading history of less than a year, and Fidelity National Financial (FNF), a title insurance specialist that was the subject of an earlier Ycharts article.
“As the housing sector continues to right itself, the market for mortgage loans and refinancings is picking up,” the Turner analysis states. “Mortgage originations are forecast to rise 16% in 2013, according to the Mortgage Bankers Association. We think conditions should remain ripe for mortgage lending and refinancings, as banks wind down their deleveraging in the wake of the 2008-2009 financial collapse. As fundamentals in the housing industry perk up, we think banks that are adept at mortgage loans and mortgage refinancings . . . should benefit.”
The improvement in the stocks is more than a matter of brightening sentiment. In fact, net income for all three companies rose during the two-plus years by more than the increases in their total returns.
The healthy earnings growth and the expectation of more to come has left Wells trading at a forward PE ratio of 9.8, with First Republic and Texas Capital trading at slightly richer forward multiples of 11.9 and 12.2 times, respectively. The corresponding figure for EverBank is 21.7, making it look pricy relative to its rivals and, well, to stocks of all sorts.
If the revival in housing stalls and the projected earnings growth fails to materialize, then the outlook for bank stocks could diminish in a hurry. The Turner report suggests, however, that the recovery will take on a life of its own and maintain its newfound momentum. “The relationship between higher home prices and increasing home demand is a classic virtuous cycle,” it says. “Home buyers see prices rise, which motivates them to buy more quickly. They snap up empty homes and lower the inventory of homes available for purchase, thereby decreasing supply and boosting demand, which leads to . . . you guessed it, higher home prices.”
Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at email@example.com.
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