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Most of the focus in recent weeks has been on Europe, first the Italian political crisis and then the Cyprus drama. Meanwhile, the market has somewhat ignored the steady flow of strong economic numbers here in the U.S.
Starting two weeks ago, we’ve seen better-than-expected data in the labor market as weekly jobless claims hit new lows for the recovery. Part of the reason for that improvement has been the fact that the housing market’s recovery continues to accelerate, which is creating more construction and housing-related jobs.
If the Great Recession taught us anything, it’s that the housing market can have a huge impact on the economy. Last week data on housing starts, existing home sales, and prices continued to improve. And as the housing market recovers it is proving to be a big tailwind for the economy.
One example of just how beneficial a rising housing market is for the economy can be found here …
Lots of previously underwater homeowners are now right side up. Therefore, they can: 1) refinance their mortgage and take advantage of Fed inspired ultra-low rates, or 2) sell their home without taking a huge loss, and move to a different area of the country with better job prospects.
Both of those events are positive for the economy. And with a recovering housing market they are possible for many more homeowners than over the past several years.
Another beneficiary of this recovering housing market is the …
Regional Banking Sector
While large, multi-national banks must contend with European related volatility given their international exposure, regional, domestically focused banks don’t — letting them enjoy the full benefits of a recovering housing market.
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| Regional banks are in a good position to benefit from the housing recovery. |
Regional banks stand to benefit from an improving housing market in multiple ways:
First, banks aren’t in the business of owning homes. So foreclosed or bank owned properties that increase in value are more likely to be sold, freeing up cash to lend to borrowers.
Second, when consumers see their home values rising, they benefit from the “wealth effect” in that they feel more secure and wealthy, which means they are more willing to take out additional loans, open credit cards, and generally spend more money.
As the housing market continues to recover and consumer behavior returns to normal, I expect regional banks will continue to benefit from the trend, both directly and indirectly.
Still, interest rates are very low and are sure to rise in the future. But initially an increase in rates will actually be a positive for banks, as it will increase their Net Interest Margin (NIM). This is the spread between the interest rates they charge borrowers versus the rates they pay depositors.
One way you can play the regional banking sector is through the SPDR S&P Regional Banking ETF (KRE). This exchanged-traded fund provides exposure to many of the country’s regional banks — potentially giving you the benefit of a recovering housing market, without the international risk.
Best,
Tom Essaye
Tom Essaye oversees Weiss Group’s Million-Dollar Contrarian Portfolio, in which company founder Martin D. Weiss has staked $1 million of his own money.
Tom began his financial-services career at Merrill Lynch, where he worked on trading desks on the floor of the New York Stock Exchange. While on the floor, he managed multi-million dollar equity trades from some of the biggest hedge- and mutual-fund firms.
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Do you believe that the Housing sector will continue at the same pace?
Our view is that the uptick there will slow down fast.
Just take a look at Earnings.