A Solid Bet For the Increase In Demand For Housing

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Is the housing market really rebounding? Many think so, and the numbers seem to be pointing towards a "yes." According to Gus Faucher, a senior economist at PNC Financial Services Group:

“The fact that single-family starts are up is very encouraging, it is more important to the economy in terms of employment and growth... The housing market recovery is continuing and will be an important contributor to economic growth. Permits look very solid, and that is a great sign.”

In January, ground was broken on the most U.S. single-family homes in more than four years, with work beginning on 613,000 single-family houses at an annual rate-- the most since July 2008. 

The homebuilders

In the same month of January, builders issued over $2 billion in debt and equity. $6.3 billion of debt was issued in total last year-- the most in recorded history. D.R. Horton (NYSE: DHI), the nation's largest homebuilder by volume, reported a 139% increase in net income at the end of their most recent quarter, with homebuilders revenue rising 39% year-over-year. The company's Chairman of the Board, Donald R Horton chimed in by saying that:

"This quarter was our most profitable first quarter since 2007, with $107.9 million of pre-tax income, a 270% increase from the year-ago quarter. We experienced substantial increases in the number of homes sold, closed and in backlog compared to the year-ago quarter. At the same time, our average sales price has increased due to pricing power, geographic mix and larger average home size. As a result, we achieved dollar value increases in homes sold of 60%, homes closed of 38% and backlog of 80%."

Mr. Horton also cited increasing demand and his company being "the best positioned it has been in its 35 year history". The company seems bullish on homebuilding due to demand, but is this demand really there? Or should we be a little more skeptical, like Joel Shine, chief executive officer of Woodside Homes, who said that he “hope[s] the housing market is as good as the capital market seems to think it is,” explaining that “Right now, housing is the pretty girl at the bar.”

Demand is picking up

The demand is increasing, and this demand may even be sustainable as long as there are more buyers than sellers. Home prices seem to be rising, primarily due to low supply. The number of available homes for sale fell to a 13 month low in January according to the Wall Street Journal, and Greg McBride, senior financial analyst at Bankrate.com, claimed that, "On a national scale, the market is clearly rebounding... It's not that the prices are crazy, but the buyers outnumber the available homes for sale." 

With foreclosures dropping and rates remaining ridiculously low, it doesn't appear that this trend will slow down, especially if supply remains low. Supply may pick-up, however, if more homes are built. Supply may actually increase as prices go up as well, if "underwater" individuals sitting in their homes can break even or even make a profit. The supply of homes is at its tightest since the "bubble days" and prices are increasing:

 

Source

Waiting for supply...

As supply remains tight, coupled with rising home values, home improvement stores will likely benefit the most from people staying in their homes and remodeling. Home Depot  (NYSE: HD) is the largest home-improvement retailer in the nation, and recently reported its fourth quarter results, beating expectations- with net income also rising 32% year-over-year. The company also announced that it would be raising its dividend and buying back $17 billion worth of its own shares. The second largest home-improver, Lowe's, reported a decrease in net income-- but like its competitor Home Depot, also managed to beat analyst expectations. 

Sherwin-Williams (NYSE: SHW) is another home-improvement company. The company manufactures, distributes, and sells paints and related products. Sherwin-Williams is the largest producer of house paint in the United States by revenue. One advantage Sherwin-Williams has over competitors is its popularity with professional painters. More homeowners are shifting away from do-it-yourself painting of their homes as professional painting becomes more affordable. Professional painters have significantly increased their presence in the residential painting market, and since Sherwin-Williams sells a good amount of its products to professionals, they should see beneficial results from a recovering housing market.

The bottom line

The housing market seems to be lacking supply, which is helping to increase home values. This is leading to good things for improvement companies like home depot and companies like Sherwin-Williams who provide home-improvement products. There is also increasing demand amongst prospective home buyers. D.R. Horton will capitalize from this demand. This homebuilder is also more attractively valued than the aforementioned stocks, with a P/E of only around 8. Home Depot and Lowe's are trading at around 22-23 times earnings, and Sherwin-Williams is trading at a P/E ratio of about 26.

As home values continue to rise and supply continues to tighten, demand will also  increase-- and this demand will inevitably need to be met. The home-improvement trend in turn may cool down and shift more towards the homebuilders who will continue to build to fill this increasing demand of home buyers who outnumber the amount of available homes for sale. D.R. Horton is attractively valued now and can be bought as a housing market rebound play to follow this trend. 


Jharry1 has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Sherwin-Williams. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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