Survival of the Richest - InvestingChannel

Survival of the Richest

Proprietary Data Insights

Top Bank Stock Searches This Month

“#1”Bank of America“110,515”
“#2”JPMorgan Chase“107,812”
“#4”Wells Fargo“35,731”
“#5”Bank of Nova Scotia“11,720”

The latest data on the big banks and housing underscores our economic reality: We live in a society of haves and have-nots. 

On Wall Street and Main Street, there’s a stark divide between those doing great with money and those fighting for pennies as they struggle to make ends meet amid record-high prices for seemingly everything. 

Let’s start with Wall Street.

Open a savings account at Bank of America (BAC) or Wells Fargo (WFC) and they’ll pay you a paltry 0.01% to 0.02% interest rate. 

Meantime, check out how BofA and Wells, like many big banks, continue to benefit from rising interest rates. 

BofA first…

Source: Bank of America

Net interest income (NII) there increased $2.7 billion, or 24%, year over year, to hit $13.9 billion. Between Q2 and Q3, NII rose 11.2%, or $1.4 billion. 

Similar story at Wells…

Source: Wells Fargo

NII there is up 36%, or $3.2 billion, year over year and 19%, or $1.9 billion, between Q2 and Q3. 

What is NII?

Net interest income is the difference between how much income banks generate from loans and the interest they pay out on deposits. The Juice has been following this metric all year. And we’re beyond annoyed. 

We’re kind of angry. 

The government loves to intervene in the economy. How about a little intervention that says banks must increase how much interest they pay out to consumers and small businesses in proportion to how much they benefit from soaring interest rates and higher loan balances? 

Now, scroll with us for an illustration of our dichotomous economy on Main Street.

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Survival of the Richest

Key Takeaways:

  • The starter home used to be stop #1 on the road to the American dream. 
  • For many households, it’s become the runaway American dream. 
  • You need to make a relative ton of money to afford even the most basic single-family home in almost all U.S. cities.



Source: Point2

According to Point2, U.S. renters can comfortably afford to buy the typical starter home in just four places Detroit, Tulsa, Memphis, and Oklahoma City. 

For example, in Tulsa, renters earn an average of $35,000 a year, but need to make only $30,000 to comfortably pay the mortgage payment on the typical starter home there. 

Comfortably pay meaning allocating no more than 30% of their household income to their housing payment. 

A starter home is a single-family property of less than 1,400 square feet. 

It used to be the relatively easy entry into home ownership for Americans: 

  • In the 1940s, 70% of all newly constructed homes were starter homes. 
  • As of 2019, that number dropped to 7%, thanks to the higher cost of building and zoning restrictions, not to mention demand for larger, McMansion-style homes when prices and mortgage interest rates were lower. 

With so little supply amid record home prices and super-high mortgage rates, renters earning the median renter household income in most U.S. cities can’t afford this type of dwelling, let alone something larger and more expensive. 

This data contrasts with what The Juice highlighted the other day. Well-off renters commit less than 30% and sometimes 20% of their income to housing. Logic tells us these people can afford the jump to home ownership. But but they’re living comfortably as renters, possibly under rent control regulations. So why make the move? 

Not the case for other renters. 

  • In San Francisco, the average renter household makes $100,715 annually but would have to make $251,190 to cover the payments on a so-called starter home. This means their income is 60% short. 
  • It’s worse in Los Angeles, where the discrepancy is 70%. 
  • In New York, it’s 66%. 
  • In Miami, 60%. 
  • In Austin, 58%. 
  • And in Tucson, 52%. Just to name a few. 

As mortgage interest rates increase we’re at 7.2% on the 30-year so does the affordability gap. 

  • In August, with 5.5% rates, you could buy a starter home and spend less than 30% of your income on your housing payment in six cities. 
  • Once we got 7% rates, Kansas City and Baltimore dropped off the list, bringing it to the aforementioned four. 

The Bottom Line: The most well-off among us be it big banks, relatively rich renters, or homeowners who locked in low interest rates prior to 2022 fall into that category because of their financial strength. 

For much of the rest of the country, the struggle is real. The struggle to generate income on savings. The struggle for upward mobility, which we often define as becoming a homeowner. The struggle to just get by. 

But if you have cash to spare, this might be good news from an investment perspective. The other day, The Juice offered two ideas to play the haves and have-nots thesis. In this environment, we also love market-crushing consumer staples stocks that pay reliable dividends. 

As for banks, investors have yet to bite. 

Stock price

WFC and BAC are down 13% and 27% respectively over the last year as of late Wednesday. 

While both stocks have price-to-earnings ratios around 11, this isn’t uncommon among bank stocks, given their debt use and generally risky nature. 

Plus, we’ll almost certainly enter a recession. From there, interest rates will likely start to drop. NII will take a hit. So will bank bottom lines. If the consumer weakens during some sort of downturn, this is more bad news for banks. 

Next week, The Juice digs deeper into big bank earnings reports to help gauge the health of the consumer, particularly from a consumer-debt perspective.

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