Housing Soars, Retail Bores - What it Means for These Companies

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Home improvement is not just a 90’s sitcom starring Tim Allen. It’s the retail space where companies like Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) operate. When the housing bubble popped, these companies were hit the hardest. Now, with the resurgence in home sales and housing starts they’ve come back strong.

Over the last 15 months, Home Depot and Lowe’s shares are up 115% and 74% respectively from their lows. Is it time for investors to nail in some profits before they get, ahem, screwed?

These two companies are caught in the middle ground between the housing market and retail consumer spending. In order for them to succeed, both of those sectors need to have a positive outlook.

Housing Outlook

Housing looks to be moving in the right direction. Home prices have risen year-over-year for seven consecutive months. To put that in perspective, that hasn’t happened since 2006, when talks of the housing bubble popping were just starting to surface. The median price for a previously owned home rose 11.3% in September to $183,900, the largest year-over-year improvement since November 2005.

The housing recovery is tied to the Federal Reserve’s efforts to keep interest rates low through mid-2015. With mortgage rates reaching an all-time low this week, more potential home buyers are able to afford a house. Existing home sales are projected to increase 9% this year and by 8.7% in 2013. Analysts expect similar growth in 2014.

Housing starts in September jumped 15% to an 872,000 rate. Mary Rinehart, CEO of Berkshire Hathaway’s building products unit, says she expects 850,000 starts in 2013 and 1.6 million five years from now. With the recent surge in home building, new homes may actually provide growth to the housing sector this year. That’s something that hasn’t happened since 2005.

Overall, the outlook is bright for the housing market. As the economy gets back on track home sales will continue to increase. Home Depot and Lowe’s ought to see similar sales increases as homeowners look to fix things up before selling or right after buying.

Retail Outlook

Last month, retail sales dipped 0.3%. This marks the first time in four months retail sales declined. Hurricane Sandy is a major contributor to the decline, which hurt auto sales significantly falling 1.5%. Yet, even removing auto sales, retail sales were flat in October.

The real culprit is the looming fiscal cliff. Consumers fearing a tax increase have become more cautious as the fiscal cliff dominates the news media. I believe that this will continue to drag down consumer spending until it gets resolved.

Even Wal-Mart (NYSE: WMT), the low-priced retailer, is seeing trouble in the retail sales of the United States. When consumers are becoming more budget-aware price-conscious shoppers, they head to Wal-Mart. Yet, in this environment, Wal-Mart looks to its international segment for growth. The company reported lower than expected revenues earlier this week, and reported a weak outlook for the fourth quarter.

Perhaps, we’ll get some good news based on Black Friday sales, but for now, it looks like consumer spending is dipping again as we head toward the fiscal cliff.

Stuck in the Middle

With the housing market finally showing signs of life, Home Depot and Lowe’s have come roaring back this year. However, retail spending is on the decline again, and consumers are becoming more aware of their budgets. Home improvement is sometimes a necessity, but often a luxury, and consumers aren’t spending a lot on things they don’t need right now.

If the government fails to resolve the fiscal cliff in a timely manner, both retail and housing are going to take a hit. However, I remain optimistic that the issue will get resolved. Once it does, we’ll have a clearer outlook on these two markets that have the biggest impact on home improvement retailers. If I owned shares of either company, I might take some off the table, but I wouldn't sell all of it. For now, I’m taking a wait and see approach.

adamlevy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot and Lowe's Companies. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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