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Warmer Weather Thaws Home Improvement Spending

15 August 2014 in Trading Ideas

Homeowners have finally warmed up to restarting home-remodeling projects that lay dormant during the earlier part of the year.

As Investor’s Business Daily recently reported, industry experts are expecting home improvement spending to heat up amid prospects for a brighter economy and jobs picture.

That could mean good things for home improvement retailers such as Home Depot and Lowe’s, both of which are expected to produce consistent double-digit profit gains in coming quarters.1

 

Home improvement investments have recently had a good run. The Home Improvement motif, nearly half of which is weighted by shares of Home Depot and Lowe’s, has risen 3.9% in the past month. In that same time period, the S&P 500 has slipped 2%.

Not that everyone is surprised that the sector has started to improve. Back in April, a piece by Barron’s touted the potential upside for Home Depot, especially if housing market growth started to kick in.2 The publication said that the company decided to cut costs and worked to improve customer service after the housing slump. In 2013, it posted 6.8% growth in comparable-store sales, its highest level since 1999.

According to Barron’s, the company emerged from the housing bust leaner and smarter. Sales (as of the April article) have risen 10.6%, since 2009, but profits have jumped 133% as a result of cost cuts, share buybacks, and tighter inventory management.

Now, it appears, that headwind of home prices remaining solid is a reality. Ken Fears, director of housing, finance and regional economics at the National Association of Realtors, told IBD that he expects prices to slowly rise through the end of the year and into 2015, which will enable people to get financing for equity loans. “For those reasons, as well as very tight inventory, there may be more interest in remodeling in the near term,” he said.

Celia Chen, a senior director who covers the housing industry for Moody’s Analytics, is also encouraged by retail sales at building material and garden supply dealers, which rose 4% from a year earlier in the first quarter, according to data from the US Census Bureau.

New construction activity is also set to improve, which is another good sign for the remodeling market.

Home sales and construction can have a positive impact on remodeling because many sellers do projects in order to improve the marketability of their homes, and many buyers do remodeling projects after they move in, the IBD noted.

Bad weather dampened new construction in the first quarter, according to Stephen Melman, the economic service director. But the forecast for the third and fourth quarters is much better, Melman told IBD.

As we saw with the job market, the picture – for now – for housing and home improvement stocks has appeared rosier the farther we get away from winter.

1“Home-Remodeling Spending Heats Up,” Investor’s Business Daily, July 24, 2014, http://finance.yahoo.com/news/home-remodeling-spending-heats-202200282.html, (accessed Aug. 12, 2014).

2Avi Salzman, “Sunny Skies Over Home Depot,” barrons.com, April 19, 2014.

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