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How the Housing Market Could Affect Stocks in 2015

By Matthew Frankel, CFP® - Jan 24, 2015 at 9:02PM

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Housing's performance in 2015 can affect stocks in several ways, beside the obvious impact on homebuilders. Here are two other sectors that could benefit from a strong housing market this year.

The housing market can affect the stocks of various companies in a variety of ways. Obviously, if the housing market is strong, homebuilders and home-improvement retailers are in a good position to perform well.

However, the effects of housing on the stock market don't end there. Here is a quick overview of how the market could impact two of the other sectors you may be invested in, financials and retailers, and the companies that could be solid ways to play a strong housing market in 2015.

This is the sector that could potentially see the biggest impact from housing in 2015. Since over 70% of homeowners have a mortgage, banks could see their lending business rise and fall based on what housing is doing.

Specifically for 2015, both Fannie Mae and Freddie Mac have announced programs for first-time homebuyers to obtain a conventional mortgage with just 3% down.

And, mortgage insurance premiums are being cut on FHA-backed loans. Up until just recently, borrowers had to pay 1.35% of their loan value each year for mortgage insurance, and it was just announced that this is dropping to 0.85%. On a $200,000 loan, this could save borrowers $1,000 per year.

These are great new loan options that first-time homebuyers may rush to take advantage of while interest rates are still near-record lows

Stocks that could benefit the most from an increase in mortgage activity include those with the largest mortgage lending operations. Wells Fargo (WFC 0.30%) is by far the top mortgage lender by volume, so it could definitely see its profits rise and fall based on what housing is doing, and how popular the new lending programs are.

On the other hand, if interest rates were to rise suddenly, it could cause home sales (and lending) to slow down considerably. However, with the new and improved mortgage options, the signs definitely point to a good year for mortgage lenders.

Big box retailers have benefited and could continue to benefit from the improving housing market in the U.S. But, they aren't the only retailers that could see sales rise in a strong housing market.

Retailers that deal in home furnishings could do well, as an increase in home sales means more houses to furnish. Electronics and appliance retailers could also see their sales soar. In fact, any retailer that sells anything that goes inside of a house could see a boost.

Rather than trying to pick and choose specialized retailers, I prefer a big-box retailer like Target (TGT 0.97%), which has a very strong home furnishings business, a home electronics business, plus the diversity of groceries, clothing, and all of the other items the company sells.

Additionally, Target is a "Dividend Aristocrat", having increased its dividend for 47 consecutive years, which makes it an excellent candidate for a long-term addition to your portfolio. Not only do dividend aristocrats like Target tend to perform very well over the long run, but they also tend to outperform during volatile times as well, making it an excellent play on housing in the (so far) wildly unpredictable market of 2015.

What the experts say
As you may expect, many experts are predicting strong activity from first-time homebuyers, which could be great for retailers because these buyers generally don't have furnishings and other home-related items yet.

As far as home prices are concerned, gains are widely expected to slow down, and between 2%-5% price appreciation for the year seems to be the consensus. However, this could be a very good thing for the housing market and the companies that depend on it.

Year after year of double-digit home price gains isn't any healthier for the real estate market than the crash of the late 2000s was. A healthy market is one that experiences slow, steady gains of about 3%-5% per year -- much like the U.S. market did before last decade's bubble.

Steady home price gains mean that homes will remain more affordable over time to those who are looking to be homeowners. So, if the experts are right and we see mild gains and an influx of buyers, the stocks mentioned here, and many others as well, could definitely see their profits grow.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
$167.74 (0.97%) $1.61
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$43.89 (0.30%) $0.13
Federal Home Loan Mortgage Corporation Stock Quote
Federal Home Loan Mortgage Corporation
$0.62 (3.31%) $0.02
Federal National Mortgage Association Stock Quote
Federal National Mortgage Association
$0.64 (3.84%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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