The housing market has been a hot topic in the last year. Low interest rates fueled soaring prices, and homes on the market are at historic lows. The increased equity, tight supply, and amount of time spent at home during the pandemic have led to a wave of home renovation.
All of those moving pieces are wind in the sails of composite-decking maker Trex (TREX -1.08%). But now that interest rates have spiked, the virtuous cycle could be shifting into reverse. Let's look at the numbers to see how concerned shareholders should be.
Image source: Getty Images.
Outdoor living is becoming more popular
The number of single-family homes built with a deck varies by year. But the demand for having space to grill, socialize, and enjoy nice weather has definitely increased over time.
The pandemic put a premium on space. Spending so much time at home made owners keen to get the most out of every square foot available -- including the yard. And the risk of gathering indoors made outdoor living even more important for entertaining family and friends.
Growth has outpaced home construction
Trex benefited from the demand. Sales grew 36% last year after never exceeding 18% in the previous decade. Historically, growth has outpaced new-home construction. Renovations are a key driver of the business.
Data source: Trex, U.S. Census Bureau. Chart by author.
There could be trouble ahead
The tailwinds led management to invest in manufacturing capacity to help it meet the growing demand and take market share with shorter lead times. Its projects in Virginia and Nevada lifted production capacity by 85% over 2019 levels. It also recently announced a new location in Arkansas that should come online in 2024.
Inflation -- and the Federal Reserve's plan to raise interest rates to fight it -- add risk to those expansion plans. Trex can easily handle its small amount of debt.
But the housing market is starting to show cracks. Mortgage applications are the lowest since spring 2019, and refinancing is down even more.
Renovations often rely on refinancing a home to use equity for the upgrades. The fear that high interest rates will block the path of funding has more than cut shares of Trex in half -- their lowest levels in two years.
Only time will tell if today's prices are a bargain or just the beginning of a move to pre-pandemic lows. For now, home prices are still rising and inventory remains at record lows. That should keep the renovation train rolling. I would be surprised if long-term housing trends and a skilled management team don't beat the market by a wide margin over the next three to five years or more.
