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The housing recovery looks to be a source of opportunity for investors.
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Sectors that may benefit include building product manufacturers, banks and certain retailers.
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Recovery may proceed unevenly, so investors should evaluate companies carefully.
Although the economy is likely to be fragile in 2013, we believe the recovery in housing will remain a durable investing theme throughout the year and beyond. The housing recovery is by no means a secret, and the shares of many companies that stand to benefit have the shares of many companies that stand to benefit have already appreciated. As a result, it is important for investors to avoid overpaying for this exposure. In addition, the housing recovery will unfold over a few years and may have fits and starts. When searching for investments that may benefit from a recovery in housing, keep time on your side by seeking well-run, market-leading companies that are gaining share in their industries.
Which sectors may benefit?
- Building product manufacturers: Building products companies derive less of their sales from new construction so their revenue growth has lagged that of homebuilders in 2012. New residential construction represents only about 10% of building product sales now and, even at mid-cycle, repair and remodel accounts for 70% to 80% of demand (National Association of Home Builders). Repair/remodel demand is closely associated with housing turnover.
- Banks: Banks are another important part of the housing ecosystem and are prominent beneficiaries of improved housing activity. As banks and homebuyers feel better about housing, banks originate more mortgages, generating not only fee income at the time of origination but also valuable servicing streams based on the portfolios of loans. These portfolios can be sold at a gain, or kept “on the books” until maturity. In addition, the recovery in prices reduces the severity and incidence of credit losses. Those firms that can gain share of loan origination without lowering standards will build more valuable loan books and franchises. These appear to represent the more attractive investments for investors.
- Retailers: Retailers, to varying degrees, also benefit from a better housing market. Home improvement retailers derive 60% to 70% of revenue from repair and maintenance. So it is existing home sales, as opposed to new home sales, that generate spending at home improvement centers. Despite the improvement in retail sales for home improvement and home goods, there is plenty of room for continued improvement as sales follow along with the improvement in the housing market. Housing turnover also benefits home goods and electronics retailers.
It is important to keep in mind that housing is a “slow burn” theme. Talk to your financial professional today to learn how you might take advantage of these investment opportunities.
