3 Stocks to Thrive in the U.S. Housing Market

The Milken Institute's "Real Estate Housing Builds a New Foundation" conference showcased several of the industry's top business minds and thought leaders discussing the current trends and future expectations for the housing market. While the industry as a whole looks bleak, the content provided might explain why Home Depot (NYSE: HD  ) , Lowe's (NYSE: LOW  ) , and Restoration Hardware (NYSE: RH  ) remain great investments.

What's wrong with housing?
In real estate, housing affordability remains solid, but the formation of new homes is among its lowest in decades.

Specifically, 31.2% of adults between the ages of 18-34 are still living at home, which is the highest in decades. In retrospect, it's this age group that's hindering the growth of the housing market, as job creation and wages are not sufficient to buy new homes.

Experts all agree that interest rates are low enough for first-time buyers to afford houses. But with mortgage applications by volume essentially flat since 2010, we can see that low interest rates are having very little effect on first-time and young buyers, as this population elects to rent instead.

Investors carrying the weight
Reportedly, 15% of new home purchases over the last couple years has come from investors, those who are either renting property or making renovations to increase the value of purchased homes. Since 2007, the number of rental homes on the market has increased by nearly 75% to 1.7 million in total, showing a clear industry where investors are at work. Hence, this is a multi-billion dollar market and might explain why the likes of Home Depot and Lowe's have performed so well, growing at rates that exceed the rate of the overall housing market.

As investors buy homes to rent, improvements are needed, which is where Lowe's and Home Depot come into play. Specifically, Lowe's grew revenue by 5.7% last year and is guiding for growth of 5.7% this year, annual results that are about double the retail sector's growth.

Like Lowe's, Home Depot is guiding for revenue growth of 5% this year, but last year its existing stores grew an impressive 6.8%. With Home Depot and Lowe's both trading at 15 times forward earnings and expected to see continued growth amid continued housing trends, both look to be great investments.

Wealthy continue to buy
The second significant driver of housing growth is in luxury or high-income homes. In fact, sales of homes priced below $500,000 saw no growth last year, but those priced above $750,000 grew between 10% and 15%.

In retrospect, this likely explains why Restoration Hardware has performed so well, more than doubling since its 2012 IPO. Restoration Hardware sells home- improvement products for the wealthy, offering furniture, lighting, textiles, bathware, decor, and outdoor and garden as well as baby and child products.

In 2012, Restoration grew sales nearly 25%, and last year its net revenue grew 33%. But what's impressive is that Restoration accomplished this feat without adding one new gallery, or store, meaning it all came from existing stores and increased traffic.

Therefore, investors should be thrilled that Restoration is finally expanding with three new galleries this year, increasing the size of its largest gallery, and looking to add 20 new galleries to its current count of 70 in the coming years. This fact combined with the continued buying pressure among the wealthy should bode well for investors.

Final thoughts
In the latest data published in April, existing home sales declined 8% year over year, new home sales were down 14%, and mortgage lending hit a 14-year low. Therefore, the housing market as a whole remains immensely challenged, but that doesn't mean there aren't certain bright spots.

In retrospect, there's a reason that both Lowe's and Home Depot have outgrown GDP and that Restoration Hardware has become one of the fastest growing companies by comparable sales in retail. It's because all three companies cater to parts of the housing market that are thriving and are expected to continue doing so, signaling good investments.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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9/1/2015 4:00 PM
HD $113.07 Down -2.80 -2.42%
Home Depot CAPS Rating: ****
LOW $67.75 Down -1.42 -2.05%
Lowe's CAPS Rating: ****
RH $91.33 Down -1.15 -1.24%
Restoration Hardwa… CAPS Rating: ***