Time to move in? Shares of companies with ties to the housing market are surging.
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
If the housing market is really on the mend, that is undeniably a good sign for the broader economy and the stock market.
Guess what? It’s increasingly looking like the housing rebound is, to pull a famous Seinfeld phrase, real and spectacular.
Home Depot (HD) reported profits Tuesday morning that were much better than forecasts. It also raised guidance.
In its earnings release, CEO Frank Blake said the company is continuing to “benefit from a recovering housing market” despite the fact that there was “less favorable weather” during the quarter.
Some retailers have blamed the snowy and cold winter for soft first-quarter results and a slowdown in consumer spending. So it’s really encouraging to see that Home Depot bucked that trend, thanks to the comeback in housing.
Related: Home appraisals no longer derailing sales
Shares of Home Depot were up nearly 2% Tuesday, making them the top performer in the Dow on an otherwise ho-hum day for the broader market. Home Depot rival Lowe’s (LOW), which reports its earnings Wednesday, rose slightly as well.
Both stocks have posted phenomenal returns so far this year. Other companies catering to the housing market, such as paint maker Sherwin-Williams (SHW), furnishings manufacturer Leggett Platt (LEG) and kitchen supplies retailers Williams-Sonoma (WSM) and Bed Bath Beyond (BBBY) have also been Wall Street studs this year.
All of these companies are part of the somewhat erroneously named SPDR SP Homebuilders (XHB) exchange traded fund, which also owns shares of actual builders. The ETF is up almost 20% so far this year, following a nearly 60% pop in 2012.
It makes sense that housing related stocks are trouncing the market.
The Federal Reserve has kept interest rates at historically low levels for a long time. Add in the numerous rounds of bond and mortgage-backed security purchases and you understand why mortgage rates have remained unusually low for a lot longer than they probably should be at this stage of the economic recovery. That’s boosted demand for housing. We’re seeing it in increased home prices, higher sales and a pick-up in building activity.
Of course, investors now have to worry if there is a new bubble inflating in the housing market. In fact, homebuilder stocks have been falling for the past few days.
PulteHome (PHM), Lennar (LEN) and D.R. Horton (DHI) were all among the worst stocks in the SP 500 Tuesday.
Related: Apartment construction slows but single-family home activity remains strong
But these stocks are all simply pulling back from 52-week highs. It’s natural for investors to take some money off the table. And it’s premature to suggest that the housing market is already approaching a top again.
The mistake that some are making about the housing recovery is to assume that it can’t last for a long time. But given how far the residential real estate market fell in such a short period of time during the Great Recession, it’s not a stretch to think that a recovery will unfold gradually over a period of years.
If you look back at the first-quarter results of just about any company with tangential ties to housing, the comments from executives are bullish.
Paint maker Valspar (VAL) noted that housing is in recovery mode several times during its conference call earlier this month.
Online real estate listing firm Move (MOVE) said “that it’s increasingly clear that a national housing recovery is underway.”
Executives at both Citigroup (C) and fiber glass maker Owens-Corning (OC) … start humming the Pink Panther theme … noted that they think the recovery in housing is “sustainable.”
And in perhaps the strongest endorsement of the housing market, real estate developer Brookfield Residential Property (BRP) went as far as to say that “in the U.S., the housing recovery appears to be in full swing.”
Related: Home price rise continues to pick up speed
It’s understandable that many are still skeptical. But the sheer volume of comments about how the housing market has finally turned the corner can’t be dismissed.
Now we just have to hope that the housing rebound leads to even more job growth. If that happens, the entire economic recovery, and by extension the stock market rally, could last a while longer.
By the way, which one’s Pink? A quick shout-out to a reader who answered one of my silly Name That Tune Twitter challenges. With Yahoo (YHOO) making news for its acquisition of Tumblr and revamp of photo sharing site Flickr, I decided to ask followers if they could identify this song lyric.
Congrats to the winner!
Great song from the debut album. (Poor Syd Barrett). I am a sucker for Pink Floyd. So much so that I had to tweet the following after my colleague Maureen Farrell reported that JPMorgan Chase (JPM) shareholders voted to allow Jamie Dimon to keep both the chairman and CEO titles.
I guess some could accuse me of frittering and wasting the hours in an off-hand way on Twitter.
Article source: http://rss.cnn.com/~r/rss/money_topstories/~3/uAHaJCP48f4/