In this segment from the MarketFoolery podcast, host Chris Hill, Jim Mueller of Stock Advisor and Motley Fool Options, and David Kretzmann of Motley Fool Rule Breakers and Supernova discuss the unsurprising news that new housing starts hit the skids in September.
The impact of a couple of hurricanes really pulled down the averages. But there are other issues relative to labor that have been putting the brakes on any potential construction boom. Speaking of weather-related revenue troubles, expect to also hear a lot more about them from a host of businesses as earnings season returns.
A full transcript follows the video.
This video was recorded on Oct. 18, 2017.
Chris Hill: Monthly housing starts in September came in lower than expected. U.S. homebuilding fell to a one-year low. Although, Jim, we were talking before we started taping, I'm not entirely sure why this is a surprise when you consider the impact of the recent hurricanes.
Jim Mueller: Right. The numbers were, September housing starts came in at 1.127 million. But the expectations were for 1.18 million. And as you said, a one-year low. So that's down about 4.7% nationwide. But in the south, where those hurricanes hit, in Texas, that's a big area, Florida is a big area, the downdraft was 9.3% for those. And that's to be expected, because about half of homebuilding in the nation is down in the South. I follow Meritage Homes, a recommendation in Stock Advisor and Options. They've been saying that construction is already tight. They've had labor issues for years, basically since the housing bubble popped. All the skilled workers were laid off, and of course they had to go find other jobs. Now that the recovery is well in place, there's not the big labor pool that homebuilders need. And that's been keeping the starts down. It's been keeping prices high, because supply is constrained.
Hill: Have they thought about paying people more money? [laughs]
Mueller: They do, but it takes a while to become skilled plumbers, electricians, all these different skilled labors that you need to build a home, especially the modern homes, the green homes, the ones that are well wired for internet and all that other stuff. And now, with all the reconstruction that's going to have to be going on in Houston and Miami and points west from there and even out in Puerto Rico and the Virgin Islands, labor is going to get even tighter. With an administration that is not too happy with immigrant labor, and where an industry has anywhere between 13% and 25%, depending on how you're counting, immigrant labor, this is going to probably be a multi-year issue, I think, certainly multi-quarter, for housing.
Hill: Do you agree with that, David?
David Kretzmann: Yeah, I think so. It's interesting. Take a step back and think about which industries will be negatively impacted by this, and some industries will actually do pretty well. Looking at total retail sales in September, they actually grew 1.6% from August, and that's the highest increase we've seen since March 2015. It looked like that was primarily due to consumers purchasing cars, gasoline, and building materials, especially in the Houston and Miami areas. You see some companies, like CarMax, the used-car retailer -- the stock is up over 16% since Hurricane Harvey hit in mid-August. Yeah, I think you'll see some companies, like the car dealerships, retailers, will probably see a nice short-term boost in business, anyway. I would think Home Depot and Lowe's would do pretty well as this rebuilding effort continues. That should be a boon at least for the next few quarters.
Hill: So what should investors expect in terms of the earnings season that is going to kick into high gear over the next few weeks, in terms of companies citing the hurricanes? Obviously, as you indicated, Jim, particularly when you're talking about housing and how dependent it is on the South and Southeast United States, that makes perfect sense. I'm also very confident that there are going to be some companies that cite the hurricanes that will leave investors scratching their heads saying, wait a minute, really?
Mueller: About the only company that I think won't be doing that is Weyerhaeuser, which is up in the Pacific Northwest.
Kretzmann: They're safe.
Mueller: But everyone else. Restaurants are going to cite it. Regular retail, not housing-related retail like Lowe's and Home Depot, but regular retail, maybe even affecting the Christmas shopping season, where people are having to spend to rebuild and restock their houses rather than buy all the toys and gifts. So yeah, this will be a while.
Kretzmann: Yeah. One company that I would expect will mention the hurricanes quite a lot would be Chuy's. It's a small-cap restaurant that started in Austin, but they have a heavy concentration in Texas, including Houston. I think, when you have a heavy concentration in that region, and you're a restaurant which has already been struggling the past couple of years, this won't help.
Hill: Well, in the case of restaurants, obviously, you're looking at revenue that's never going to come back, because you can fix up your restaurant and open it, but people aren't going to eat twice as many meals just to make up for that, whereas --
Kretzmann: Speak for yourself, Chris.
Hill: [laughs] But, with auto dealers, with car manufacturers, those are purchases that are seemingly just delayed or pushed off a little bit.
Mueller: Delayed, or even addition. If you have a car that you were thinking of replacing, but were willing to wait another year or two --
Hill: And now it's submerged.
Mueller: -- and now it's submerged or was submerged. So a lot of those have possibly been pulled forward into the next couple of quarters. So that might affect those companies further down the road.
Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of CarMax, Chuy's Holdings, and Home Depot. Jim Mueller, CFA owns shares of CarMax and Chuy's Holdings and has the following options: short January 2018 $22.50 calls on Chuy's Holdings and short December 2017 $37.50 puts on Meritage Homes. The Motley Fool owns shares of and recommends CarMax and Chuy's Holdings. The Motley Fool recommends Home Depot, Lowe's, and Meritage Homes. The Motley Fool has a disclosure policy.