Wells Fargo & Co (WFC), Standard Pacific Corp. (SPF): Three Ways to Play the Housing Recovery

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Fed’s aggressive bond buying is showing some results as the U.S. housing markets begin their recovery. Amid this recovery, I have shortlisted some companies that have significant exposure to the U.S. housing market. I believe these companies are poised to benefit from the housing recovery. Therefore, these stocks are the best way to play the U.S. housing recovery.

Wells Fargo & Co (NYSE:WFC)

The rebounding housing market

U.S. housing is showing signs of a recovery. The Case-Shiller Home Price Index (composite 20) has increased from 146.5 at the beginning of the year to 149.8. This index is a national price index for 20 cities.

The Wall Street Journal reports that home prices climbed the highest in the metropolitan areas in more than seven years. Much of the hike in prices is due to a tight supply of housing. This is why the supply and demand balance is clearly inclined towards the sellers in a large proportion of the country.

Further, the housing market is being well supported by the low mortgage rates, and this has created ample buying power for home buyers. The average 30-year fixed mortgage rate has touched 3.51%, while the average 15-year fixed mortgage rate has plunged to as low as 2.69%. These record low mortgage rates have made housing more affordable.

Much of the decline in the mortgage rates is a result of the Fed’s record stimulus efforts. Continued efforts by the Fed to buy Agency residential mortgage backed securities would mean further support to the U.S. housing markets. Therefore, U.S. financial companies with significant exposure to the U.S. housing markets should experience growth.

Largest housing lender with a diversified asset base

Wells Fargo & Co (NYSE:WFC) is considered to be the largest mortgage lender in the U.S. It once originated one in every three home loans. While its market share has gone down slightly, I believe it is still poised to benefit from the recovering housing markets as it regains its market share as the top mortgage originator and shows tremendous growth in its mortgage banking unit.

Over the past three years, the bank has reported record profits including an $18.9 billion profit for the full-year 2012, supported by the housing recovery. Warren Buffett recognizes the potential in the bank’s growth due to the recovering U.S. housing markets, which is why Wells Fargo & Co (NYSE:WFC) remains his favorite financial stock. Buffett is the largest shareholder of Wells Fargo & Co (NYSE:WFC).

The diversified business model of the bank enables it to benefit from the prevailing interest rates. Investors were concerned that the bank will be stuck with loans and other assets that might lose value faster than the liabilities. However, the concerns were brushed aside by the bank’s CFO who said Wells Fargo & Co (NYSE:WFC) will benefit from higher rates. This is because management has constructed a portfolio in a way that Wells Fargo & Co (NYSE:WFC)’s liabilities will lose value faster than its assets causing the bank to make higher returns.

Going forward, the bank will continue to benefit from a talented management team, a diverse business model, and a retail deposit base that helps drive the highest net interest rate margin. The retail deposit base is both cheaper compared to bond funding and also more stable.

Growth from California

Standard Pacific Corp. (NYSE:SPF) is a California-based homebuilding and financial services company with operations largely in California, Florida, Arizona, and Texas regions. Within the homebuilding business segment, the company constructs and sells single-family homes, while the financial services business segment provides mortgage financing to its home buyers.

In the latest SEC filings, the company reported enough inventories to meet 5.6 years of demand at the current pace. Besides, the company anticipates strong growth in new orders and total backlog and should grow at a fairly rapid pace as the markets continue to rebound.

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