Home is Where the Money Is
Remember when you couldn’t go wrong investing in home builders and their suppliers? That was about, oh, nine years ago. The housing bust may have turned you off from home investing—aside from renovating your kitchen—but the housing industry is back.
After hobbling through its near-death experience in 2008, home sale and new construction data are picking up. Total new and existing home sales rose 4.9% in May to an annual rate of 6.1 million units, the highest number since May 2007. This rosy data followed a particularly robust April, confirming that April wasn’t an anomaly.
New home starts also look robust. Home starts rose 6.6% in April and were flat in May. The annualized number of new units started is 1.16 million, and that measure has been steadily creeping up since 2011. Even better news is that inventory of new and existing homes remains low. The supply of homes for sale remains stuck between four and five months compared to the January 2009 high of 12.2 months.
More houses are being built which means more demand for companies that supply goods to the builders. The implosion of the housing market left a silver lining. For companies that survived the storm of bankruptcies and vaporizing demand, current market conditions promise bountiful returns. The 2008 to 2009 debacle left at least 80 home builders and countless suppliers bankrupt. Those that persevered are left with fewer and more rational competitors.
Data on existing and new home sales is a reliable tool to measure homebuyer confidence and the tone of the housing market. Yet it is a backward looking or lagging data point. We’ve been closely monitoring home starts data, a forward looking data point which measures the number of single and multi-family units that builders have started.
The home start data is an effective predictor of demand for insulation, doors, windows, flooring and the multitude of materials needed to complete a house. A home is counted in the housing starts data once a permit has been pulled and the initial stages of building have begun.
Anyone who has ever had a home remodeled or built can attest to the fact that there can be a significant lag between the framing of a house or the digging of a foundation and the time that insulation, lighting and floors are installed.
And the gap between the number of houses started and those completed continues to grow. Michael Miller, CFO of Installed Building Products, a supplier of home insulation noted recently that the company is still fulfilling orders from homes started in 2015,
“We believe this year is really setting out to be quite interesting, given the fact that we still have 15 backlogs that we’re working on and the 16 single-family sales growth seems to be very solid. So it’s just there’s a confluence of events that we think are making ’16 really an exceptional year.”
We’ve been working on stocks for Growth Stock Strategist and Profit Catalyst Alert that benefit from this wave of demand. We like the suppliers more than the home builders themselves as they benefit from remodels and repairs, cushioning any drop in demand when the building cycle wanes.