3 Strong Signs That Housing’s Gaining Ground

The economic recovery is under way, but most Americans are waiting for evidence of the housing market resurgence before jumping onboard the Optimism Express. But, before it can leave the station, the housing rebound's forward momentum needs to gain traction. Three segments of the housing market are giving signs that positive movement is under way, with "full steam ahead" just around the corner.

The Craftsman model: homebuilders
A rebounding housing market is easiest to monitor in the segment effected most directly. Homebuilders PulteGroup (NYSE: PHM  ) , D.R. Horton (NYSE: DHI  ) , and K. Hovnanian Homes (NYSE: HOV  ) all reported stronger growth trends in their most recent quarterly earnings releases.

Home Builder

Total Net Contracts ($)

% Growth
(YTD, YOY)

Total Net Contracts (Units)

% Growth
(YTD, YOY)

PulteGroup

$1.3 billion

43%

4,544

27% 

D.R. Horton

$4.8 billion

29%

21,048

21% 

Hovnanian

$1.4 billion

43%

4,395

33% 

Source: Company 10-Qs

All three of the builders were cautious about their results, which remain much lower than historical levels. They believe that the rebound is still in its initial phase, with growth likely to continue.

Continued signs of consumers returning to the housing market, like the release of October housing starts data showing a 3.6% increase, make it likely that homebuilders will see larger growth rates in the coming quarters. As consumer economic confidence and credit availability become more abundant, builders and other segments of the housing market will get back to full strength.

The Colonial model: Home Depot
As the largest home improvement and construction materials retailer, Home Depot (NYSE: HD  ) provides insight into several segments of the housing market. During the downturn, Depot saw first professionals, then consumers, spend less in its stores. As a result, the housing sector's lag created drag on the company's growth rates – until now.

With its third-quarter results, Home Depot reported rising contractor spending, with equal growth in professional and consumer spending. Smaller contractors, which make up 87% of Home Depot's contractor sales, are still underperforming larger firms. As market improvements continue, the retailer should regain a large segment of its contractor-based sales. Home Depot believes that contractors are also working through a ramp-up period, and it estimates that professional spending will surpass consumer spending soon.

More signs of a resurgent housing market from Home Depot:

  • Florida and California, two of the markets hit hardest during the recession, had strong third-quarter growth – a sign that housing is turning around across the board.
  • Sales volume and average ticket sales grew for the sixth consecutive quarter, with tickets over $900 up 4.3% year over year.
  • Market data shows that consumers are spending more to improve their homes, with private fixed housing investment as a percentage of GDP (2.5%) continuing its positive growth trend.
  • Growth in 2012 represents a truer picture of the housing rebound, since each quarter last year had its own weather-related incident that made home improvement spending difficult to break out.

The Tudor model: Sherwin-Williams
Much like Home Depot, paint and adhesives maker Sherwin-Williams (NYSE: SHW  ) saw a decrease in professional contractor spending. But unlike the home improvement giant, which captures a much larger swath of consumer spending, Sherwin's sales are more closely tied to contractors.

The company still sees softness in U.S. commercial sales, but has recorded a rebound with its hardest hit customer base, professional painting contractors. Sherwin expects a shift from DIYers toward contractors as the rebound continues. The paint purveyor has already seen softening in its segment catered toward homeowners, indicating that its predictions are already coming true.

Though the U.S. paint industry's sales remain approximately 15% below historical gallonage levels, that metric has increased 2%-3% year to date.

A Foolish perspective
If you want to get your portfolio on track with the housing recovery, all of the companies above enjoy abundant growth opportunities. But with the builders' stock prices largely reflecting the anticipated market growth already, they may prove more volatile, depending on investors' opinions of the recovery's progress. Investing in home improvement stocks will let you profit from the recovery while providing an added cushion from their expanded services and customer base.

The housing bubble and economic crises took a lot out of most people's retirement funds. With the housing market back on its feet, signs of economic recovery seem much more tangible. If you were one of those investors unfortunate enough to lose a substantial portion of your savings, we've found three stocks that may help you get back on track with your goals. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. To keep reading, click here now.


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