April Surge in Housing Starts Should Benefit Banks
Bank Loan Spring Update: Commercial, Residential Lending News
Housing starts soar in April
US housing starts soared to their highest level in more than seven years in April, according to the latest United States Census Bureau data released on May 19. Housing starts jumped 20.2% to a 1.14 million annualized rate. Annualized housing starts for March were 944,000. Building permits rose by 10.1% to a 1.14 million-unit annualized rate, the highest figure since June 2008.
Housing starts indicate the number of housing units that begin construction during a given time period. The starts were low in February due to a severe winter. The higher number of starts in April is a positive sign for the economy, which witnessed dismal growth in the first quarter.
Housing starts in perspective
The housing starts dipped to a seasonally adjusted annualized historic low of 478,000 in April 2009. The recovery since then has been great. The annualized rate is, however, still low compared to the average 1.45 million since 1959. The above graph shows the seasonally adjusted annualized housing starts starting 1959.
The surge in building permits indicates that the starts will remain strong over the next month as well.
Impact on banks
Residential real estate loans account for one-fourth of the total outstanding loans at commercial banks. A surge in housing starts should translate into higher loan demand to buy these houses. This should drive loan growth at banks in the residential real estate segment.
All big banks, including J.P. Morgan (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), and US Bancorp (USB), have significant residential real estate portfolios. Growth in the segment will impact these banks as well as the Financial Select Sector SPDR ETF (XLF). The banking sector makes up ~37% of XLF.
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