2 Stocks Dealing With Housing Market Fallout

The beginning-of-year rally continued for the stock market on Wednesday, with big gains for major market benchmarks. The Nasdaq Composite (^IXIC -0.64%) saw the biggest gains, but sizable moves upward for the S&P 500 (^GSPC -0.46%) and Dow Jones Industrial Average (^DJI -0.98%) signaled broad-based interest in stocks across the board.

Data source: Yahoo! Finance.

Even with the stock market looking more bullish, there are still plenty of questions on the macroeconomic front. In particular, the big rise in interest rates has had a substantial impact on home affordability, and that has implications both for companies providing mortgage financing and for homebuilders adding new supply to the housing market. Below, you'll learn about the latest news from Wells Fargo (WFC -1.11%) and KB Home (KBH -0.80%) and what it could mean for the broader market, both in housing and across stocks of various industries.

Wells Fargo pulls back on mortgage lending

Shares of Wells Fargo were up about 1% on Wednesday. The bank announced late Tuesday that it would make a major strategic shift with implications for mortgage customers.

Wells said that it would focus the scope of its home lending business, with the goal of serving more of its bank customers along with prospective clients in minority communities. In order to free up capacity for those efforts, Wells said that it would stop doing correspondent lending, which involves buying mortgage loans from other lending institutions. In addition, the bank will cut the size of its mortgage servicing portfolio.

In addition to internal efforts to serve bank customers and underserved communities, Wells will add to its Special Purpose Credit Program, along with making a $100 million investment to advance racial equity in owning homes. The bank will also deploy more of its mortgage professionals to local minority communities.

Given the immense size of the corresponding lending business, Wells Fargo's strategic shift is a big deal. Some investors, however, believe that the move is an important sign that could finally start to lift the clouds that have hung over the bank from years of customer scandals.

KB Home stock falls despite growth

Meanwhile, shares of KB Home dropped 3% in after-hours trading, giving up gains from the regular session. The homebuilder reported its fourth-quarter financial results for the period ending Nov. 30, and despite strong momentum, signs of a potential slowdown ahead still left shareholders concerned about the future.

KB Home's quarterly numbers looked good. Revenue rose 16% year over year to $1.94 billion, and earnings of $2.47 per share were up 29% from the same period a year earlier. The company's book value rose to $43.59 per share, up 27%, with strong gains in returns on equity. For the full fiscal year, earnings exceeded $9 per share, up more than 50%.

However, investors focused on CEO Jeffrey Mezger's outlook. KB Home's top executive remains confident about the long-term prospects for housing, but high mortgage rates and persistent inflation are making would-be homebuyers more circumspect about making purchases. KB Home also said that it's planning to become more aggressive with pricing entering the spring selling season in order to encourage more new orders.

Earnings multiples on KB Home and other homebuilders are at rock-bottom levels, as most investors expect dramatic pullbacks in profit as housing market conditions deteriorate. Anything short of a worst-case scenario could actually help KB Home and its housing-stock peers finally get their stock prices moving in the right direction.