Why the Dow Is Soaring

Before you go, we thought you'd like these...
Before you go close icon

Blue-chip stocks sprinted out of the gate today. At its peak this morning, the Dow Jones Industrial Average had shot higher by more than 200 points after separate reports showed that housing prices continue to head in the right direction. However, the markets have since cooled down. With roughly an hour left in the trading session, the blue-chip index is up by a still impressive 110 points, or 0.72%.

Shortly before the markets opened this morning, traders learned that U.S. home prices rose in the month of March by 10.9% compared to the same month last year. This was the largest year-over-year gain in seven years. According to the Case-Shiller home price index that surveys the nation's largest metropolitan areas, home values increased in all 20 of the cities examined.

These gains can be credited to a number of trends. First, the inventory of houses for sale remains depressed. Second, mortgage rates remain near their last year's historic lows. And finally, as a Wall Street Journal story observed this morning, speculators looking to flip houses have made their presence increasingly apparent over the last few months. In California, for example, more than 5% of all homes sold in the state were bought and then resold within six months.

Regardless of the impetus for the rise, there can be little doubt about its importance to the underlying economy. For consumers, rising home values mend personal balance sheets weighed down by underwater mortgages; according to real estate website Zillow, in the first quarter of this year, a full 25.4% of home owners owed more on their homes than they are presently worth. For banks, it means fewer delinquencies (which are expensive to service) and more underwriting activity as buyers and sellers regain confidence in the market. And for homebuilders, it means an increase in the demand for new houses.

The latter was on display last week when Toll Brothers reported earnings for its fiscal second quarter ended April 30. Aside from the fact that the nation's largest luxury homebuilder notched higher revenue and net income, the most tangible evidence of progress was in the number of units sold or put under contract. Compared with last year, the company saw its net signed-contract count increase by 36%. And over the same time period, the price of each contract advanced from $631,000 to $678,000.

Given today's news, it should be no surprise that shares of banks and other companies in the home improvement business are headed higher. In terms of Dow stocks, for instance, both JPMorgan Chase and Bank of America are watching their shares ascend. While neither of these lenders has the same level of exposure to the mortgage market as Wells Fargo, which completely dominates the field, both are nevertheless reliant on origination fees to fuel their respective bottom lines. In addition, both have massive quantities of home loans on their balance sheets and in service portfolios that they manage for third-party investors. Consequently, any improvement in home values translates directly into better collateral and lower service-related expenses.

Also up this afternoon are shares of Home Depot . The nation's largest home-improvement retailer has seen its stock soar over the last 12 months by 67%, making it the second-best-performing stock on the Dow over that time period next to Bank of America. And in its most recent quarter, it notched a 7.4% increase in year-over-year sales and 22.1% growth in diluted earnings per share. The latter figures could well continue on this path so long as the housing market doesn't falter.

The Motley Fool's top stock for 2013
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

The article Why the Dow Is Soaring originally appeared on Fool.com.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Home Depot. The Motley Fool owns shares of Bank of America and JPMorgan Chase. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading