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U.S. Housing Rebound Makes Wells Fargo a Choice Stock to Buy Now!

Muhammad Bazil

Muhammad Bazil

3 followers
There are strong indications that the housing sector in the U.S. is beginning to show some signs of recovery. What that means is that all over the country and especially in many towns and settlements where people are terribly in need of more units of new homes, we should expect to see an increase in housing construction activities any time beginning from 2013. While a rebound in the U.S. housing markets directly benefits housing stocks, some big U.S. banks such as Wells Fargo & Co. (WFC), Bank of America (BAC), JPMorgan (JPM), U.S. Bancorp (USB), Regions Financials (RF) and Citigroup (C) will also benefit because they all have significant lending exposure to tens of thousands of potential new homeowners in the U.S. mortgage markets.

U.S. Housing Data and Mortgage Markets Show a Rebound

The recent housing data released by the Commerce Department of the U.S. home construction shows 872,000 housing units were added in October which was the highest figure in the last four years. Also, the home construction figure for September went up by 15%. Construction permits also soared by 12% with a 894,000 annual rate. Compared with the figure for 2011, the construction permits saw an increase of 93.4%, the largest annual increase in about two decades.

In addition, last August, the leading indicator for the home building market in the U.S., S&P Case-Shiller Home Price Indices, shows simultaneous year-over-year increases for the 3 composite indices with 1.2%, 0.5% and 0.1% for U.S National, 20-city composite and 10-city composite indices, respectively.

Further evidence for the rebound of the U.S. mortgage markets could be seen in the increases recorded in the U.S. mortgage originations from quarter to quarter and the refinance and purchase indices. Compared with the first quarter of 2012, the mortgage originations for the second quarter grew by 2.5 percent from $363 billion to $372 billion. Recent data shows that purchase index and the refinance index increased year-over-year by 12% and 25%, respectively.

The improved activities in the U.S. housing markets have positive impacts for U.S. banks like Wells Fargo that have large exposure to the mortgage markets in the United States.

The Largest Mortgage Originator Benefits More

Among the U.S. biggest banks, Wells Fargo (WFC) is considered to be the bank with the largest exposure to the U.S. mortgage markets currently. That was the enviable position once occupied by Bank of America (BAC) after it purchased CountryWide Financial. BAC has stopped buying home loans made by the smaller banks because it is still reeling under the huge losses it incurred from the disastrous acquisition that caused BAC to bear the burden of loads of bad loans and mortgage-related lawsuits, the recent lawsuit being from the U.S. prosecutors on allegations that BAC defrauded Freddie Mac and Fannie Mae.

From being the originator of 1 out of 10 new mortgages in 2004, Wells Fargo has now grown to become the originator of 1 out of every 3 new mortgages with transactions worth $131 billion as at the second quarter of 2012. With the current level of mortgage origination, Wells Fargo has now become the originator of the largest residential home mortgages in the U.S.

Wells Fargo’s Earnings and Outlook

Wells Fargo’s third quarter result reported on Oct. 12 shows an improved profit margin largely due to a 50% increase in its mortgage-related incomes compared with the corresponding quarter of 2011. The bank grossed $21.2 billion revenues compared to $19.6 billion reported in 2011, an increase of 8 percent. Net income increased by 22 percent to $4.7 billion from $4 billion reported in 2011. Wells Fargo’s earnings per share also received a 22% boost compared to 2011 as it reported $0.88 per share.

It is estimated that Wells Fargo’s total incomes for 2012 full year could increase to $85 billion if it maintains its current rate of generating revenues in the last quarter of the year. This is because for the first nine months of the year, the bank has already generated $64.1 billion. Wells Fargo presently makes a quarterly dividend payout of $0.22 per share at a fair yield of 2.6 percent. Wells Fargo is an excellent opportunity for long-term investors like billionaire Warren Buffett who recently added to his stock position in it.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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