Even though new home sales declined in last month's report (which highlights December), I think there is still underlying strength building in the housing market. Home building has been surging, and December is typically a slow real estate month anyway. With interest rates continuing to be at historical lows, and more and more people getting into solid jobs as the employment market rebounds, it points to a strengthening housing market that will boost the economy and provide a lot of different investment opportunities.
The Signals Pointing to a Housing Market Rebound
There are a lot of signals pointing to a housing rebound. For many of the same reasons that the municipal bond market is going to rebound, the housing market should also be rebounding. The biggest is the gap between supply and demand.
On the supply side of the equation, housing supply is at record lows. Several signals point to this:
- Low inventories across the nation
- Rising real estate prices
- Non-market inventory isn't posed to move (underwater mortgages, etc.)
On the demand side, there are several factors that are creating the housing imbalance:
- Improving job market
- Record low interest rates
To combat the housing supply imbalance, home builders are pushing new housing starts are getting back to pre-recession levels. New housing starts reached 954,000 in December 2012, which is almost 30% higher than a year earlier. Home builders are building because there is demand – otherwise they wouldn't be committing so much capital. They recognize that housing is in short supply and are trying to match market needs.
All of these factors are pointing to a housing market rebound.
Focus on Suppliers of the Housing Market Rebound
So the biggest question is how you should play the housing rebound…
The biggest thing to focus on should be the suppliers of this rebound. When a market rebounds, the first place that starts to see improvement is the supplier market, because before a home can be built, the builders need to buy the raw materials to make it happen.
Think about what goes into building a house: wood, fasteners, plumbing and electrical supplies, and more. A builder needs to buy these items first to construct the home. That's why suppliers typically reap the first rewards of a market rebound.
With that in mind, some key players to watch in this space include Weyerhaeuser (WY) and other timber REITs like WOOD. You may also want to look into a construction supply company like Fastenal (FAST), which provides the fasteners and other suppliers like plumbing and electrical to home builders.
Jump in on Home Remodeling
If you go back to the supply and demand equation, one factor that is keeping supply down is the lack of people moving and buying new homes. However, with interest rates so low, this does improve the incentive for people to remodel their existing homes.
For people who've decided to settle in, the low interest rates and improving employment conditions may give people confidence to invest in their homes. This should improve many of the retail-side home remodeling companies like Home Depot (HD) and Lowes (LOW).
As more consumers go out and invest in their current homes, these companies should see a boost to their bottom lines.
Avoid Home Builders
However, even given that the housing market is going to rebound, one area that I'm avoiding is home builders. As I mentioned above, home builders are the last to reap the rewards of the housing rebound, and they bear most of the risk.
They have to put out the capital in advance to purchase the supplies and build the homes. Then, they have to spent the time building the homes, which can take months and years. Then, they have to sell them to the public.
During that time, a lot can change – interest rates could rise, the employment market could stall, or more. There is a lot of risk for home builders, and the reward may not be the good. If housing prices stall, the margins that home builders see will fall, compressing profits.
For that reason, of all the companies that will fuel a housing rebound, I'm steering clear of home builders and focusing on the companies that will supply the rebound.
What are your thoughts on the housing rebound? Are you investing in it?