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Bank of America Surges on Better-Than-Expected Housing Data

Investors in Bank of America (NYSE: BAC  ) are getting a welcome reprieve today after better-than-expected data emerged from the housing sector. Shares of the nation's second largest bank by assets have fallen by nearly 10% since the beginning of June, but are rebounding today by more than 2%.

The primary catalysts for today's climb are three reports concerning the housing sector. First, the Federal Housing Finance Agency released its estimate of April home prices (link opens PDF). According to its House Price Index, the price of homes across the country increased by 0.7% in April compared to March. On a year-over-year basis, the growth rate surged to 7.4%. It was the 15th consecutive monthly price increase in the purchase-only, seasonally adjusted index.

Second, a separate report from Standard & Poor's confirmed these results. Its Case-Shiller Home Price Index (link opens PDF) shot up on a sequential basis by 2.52% in April and on an annual basis by 12.05%. Moreover, all 20 cities covered by the index showed positive year-over-year returns for the fourth consecutive month, and a handful of them posted their highest annual gains since the start of their respective indices.

Finally, the Commerce Department released its monthly estimate of new-home sales and prices (link opens PDF). Sales of new single-family homes in May came in at a seasonally adjusted annual rate of 476,000. This was 4.1% higher than the April rate of 466,000 and a staggering 29% above May of last year. It was also the highest level in nearly five years.

While all of these reports point to a housing recovery, some of the industry's top observers are nevertheless concerned about its sustainability. "I'm optimistic in the short-run," Yale's Robert Shiller told Bloomberg News this morning. "Home prices are likely to go up for the next year and maybe longer. But the real question is: Is it going to repeat the long boom that we saw between 1997 and 2006? And I'm not so sure it will."

His concern was primarily grounded in two industry trends. As the Federal Reserve begins to taper its support for the economy, known as QE3, mortgage rates will shoot higher, sending the effective price of homes up as well. We've already seen this, in fact, over the past few months. For a period last year, the interest rate on a conventional, conforming 30-year mortgage was less than 3.5%. But since fear of a Fed retreat surfaced at the end of last month, it's shot above 4%.

In addition, many of the homes being purchased now are strictly for investment, fueled by a demand from hedge funds. A recent Washington Post article noted that "institutional investors -- who in some cases are bidding on hundreds of homes a day -- account for as much as 70 percent of sales in some Florida markets. Over the past two years, analysts say, they also have accounted for a majority of purchases in other parts of the country where housing prices are rebounding sharply." The fear is that the still-nascent housing recovery will stall once these buyers have had their fill.

But either way, for the time being at least, it's clear that investors are celebrating the direction of the housing market. And for good reason, as my colleague Morgan Housel has noted, "Housing itself won't drive a strong recovery, but it's important enough that there hasn't been a strong economy without a strong housing market in modern history."

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9/30/2016 4:00 PM
BAC $15.65 Up +0.49 +3.23%
Bank of America CAPS Rating: ****