Will Bank Stocks Soar as Auto and Home Prices Rise?

Home prices are up by more than 13% year over year in the United States, and used-car values have increased dramatically as well. In this Fool Live video clip, recorded on June 21, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss whether this could translate into big profits for banks. 

Jason Moser: I think you and I had this discussion to an extent, I believe it was last week, but you do see in these types of times with home prices on the rise, automobile prices on the rise, ultimately that kind of stuff, interest rates on the way up, that is good for banks.

Matt Frankel: On the home side, absolutely. Not just because they're going to see higher mortgage amounts; it's because the existing homeowners have so much more equity in their home right now to borrow against. I read that home equity in the United States is up by $2 trillion this year alone.

Moser: It's a lot.

Frankel: That's money that people can borrow against. If you refinance, you could borrow and take some of that money out. That's where you really get to see the banks making bigger and bigger loans. It's not necessarily the purchase market. Right now home inventories are very low despite the rise in prices. It doesn't really matter if prices are up by 20% if inventory is 50% lower than it normally is. That's not a good thing for banks. Where it's good is people who are holding on to their houses and have appreciated in value, and now can use that money to borrow against. I've mentioned the supply chain disruptions. If auto prices are going through the roof but you can't get a car, it doesn't really matter how much they cost the banks, they're not doing a loan on a car that isn't on the lot.

Moser: That's right.

Frankel: Wells Fargo (WFC -0.56%) is one of the biggest new-car lenders. If new-car dealerships don't have inventory, it doesn't matter what the price is, and how much demand has driven up the price. If there is no inventory then they're not making loans. I think the refinancing thing is really what's the big news for banks right here.

Moser: That makes sense. It was just very interesting too to see recently JPMorgan (JPM 0.49%) CEO Jamie Dimon talking about his belief that inflation to a degree may be more than transitory. He said the bank is hoarding cash because he believes there's going to be an opportunity to take advantage of that here soon.

Frankel: He said JPMorgan has $500 billion of cash on its balance sheet. I didn't just misspeak, $500 billion. That's not cash that they can go spend, just to be clear. When we say that a bank has cash on its balance sheet, it's different than saying like Apple (AAPL 1.27%) has cash. But this is cash that they could loan, this is cash that they can invest in, Treasury bonds, or something to that effect, or Treasury notes, or the short term. They don't want to right now because they think rates are low and they're going to go up. They think the Fed is going to be forced to raise rates.

The big news out of the Fed meeting was that it was originally projected, the last time the Fed made their projections, they weren't going to start raising rates till after 2023. First rate hikes would be in 2024, rather. The latest projections that just came out said now we're calling for two rate hikes in 2023. The market consensus based on the futures market is that they are going to have to hike rates in 2022, a year earlier than even they think, and there are going to be at least four rate increases by 2023. The expectations keep getting higher and higher for interest rate increases. If inflation stays where it is now, they're going to get even more. Jamie Dimon is saying that as this rates rise, there are going to be exponentially better places for them to put that cash than there are right now. That's a bold projection. He could be wrong.

Moser: He could be. But I feel like it seems like at least a reasonable bet.