Soaring Home Prices Fuel Bank of America Stock

Bank stocks are climbing today after investors learned that home prices surged in March to a multi-year high. Roughly halfway through the trading session, shares of Bank of America (NYSE: BAC  ) are up by 1.3%, slightly lagging the broader KBW Bank Index (DJINDICES: ^BKX  ) which is higher by 1.7%.

Bank of America stock has struggled over the last few years after the floor fell out from under the housing market and the nation's second largest lender, along with many of its peers, was forced to realize billions of dollars' worth of losses related to subprime lending. To be fair, most of the losses came about as a result of Bank of America's now-lamentable decision to acquire Countrywide Financial in 2008, but at the end of the day, losses are losses.

The good news, as you can see in the chart below, is that the housing market appears to have bottomed out at the beginning of last year and has since mounted an impressive reascent. Investors got a taste of this last Wednesday when the National Association of Relators reported that existing-home sales hit the highest rate last month since November 2009. This was followed up on Friday by the Commerce Department's announcement (link opens PDF) that new home sales in April had followed suit, increasing by 29% on a year-over-year basis.

With this in mind, today's news that housing prices are similarly headed in the right direction provided much appreciated confirmation of these trends. According to the Standard & Poor's Case-Shiller Index (link opens PDF), all 20 cities tracked by the measure posted year-over-year home-price increases in March for the third consecutive month, and compared to the same month last year, they were up by a cumulative 10.9%.

At the same time, however, the index committee was quick to note that "the larger than usual share of multi-family housing, a large number of homes still in some stage of foreclosure and buying-to-rent by investors suggest that the housing recovery is not complete."

Why does this matter to banks in general and Bank of America more particularly? The obvious answer is that banks are in the mortgage business. In the first quarter of this year, Bank of America originated $24 billion in home loans. While this was a pittance compared to, say, Wells Fargo's $109 billion in mortgage originations, it's nevertheless an important contributor to Bank of America's bottom line. And beyond this, Bank of America carries tens of billions of dollars' worth of home loans on its balance sheet and services hundreds of billions of dollars more for third-party investors.

Does a recovering housing market make Bank of America stock a buy?
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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 28, 2013, at 2:10 PM, Mahadfarrukh wrote:

    What about the long term? Do you expect the P/B undervaluation to come into play anytime soon?

  • Report this Comment On May 28, 2013, at 2:57 PM, JohnMaxfield37 wrote:

    Mahadfarrukh,

    It's hard to predict valuations, as they're basically a derivative of people's emotions. However, over time, if B of A continues to clean up its balance sheet, third-party mortgage servicing portfolio, and what remains of its legal liability, then I'd expect its valuation multiple to continue to improve.

    As opposed to a straight book value multiple, I'd look at the price to tangible book ratio. By that measure, B of A is trading just under 1 times tangible book.

    This isn't an outrageous multiple by any measure. As a result, there's room for both growth and deterioration. I'm personally bullish on B of A, so I'm inclined to believe its valuation will head higher. But I've been wrong before.

    John

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