This Segment of the Housing Sector Is on Fire

The U.S. housing market is a disaster. The government was able to create an artificial bump in buying and curtail a steady downtrend in housing prices by offering a first-time homebuyers a tax credit two years ago, but with that credit now gone, buying has dried up and home prices are falling once again. Many observers refer to this as a potential double-dip, but I have to wonder whether we ever really rebounded in the first place.

With so many aspects of housing in the dumps and the majority of homebuilders reporting weaker-than-anticipated earnings results, it may come as a shock that home remodels are on the rise.

Source: National Association of Home Builders.

According to the National Association of Home Builders, the seasonally adjusted Remodeling Market Index, or RMI, has hit its highest level since late 2006. The RMI measures current and future expectations for remodeling and demonstrates homeowners' recent willingness to stay put in their homes. Whether this is due to underwater mortgages or tight credit markets is irrelevant. What's important is that remodels are on the rise, and there could be a hidden opportunity in there for investors.

General remodels and flooring
Without getting into the specific segments of remodeling, Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) stand to benefit from any uptick in remodels. These two stores are the go-to sources for the do-it-yourself homeowner, and any strength in their bottom lines could translate into another leap forward in their respective dividend payouts.

Despite taking a nosedive two weeks ago, Lumber Liquidators (NYSE: LL) could be a hardwood-flooring name to consider. In its quarterly report, the company alluded to softening demand as consumers become more price-conscious, but it's clear from the RMI that homeowners are spending. With a debt-free balance sheet, a PEG below 1, and a forward P/E of just 14, this company is getting close to having just the right stock price.

Home furnishings
Furniture is a fickle sector in any environment, but it becomes significantly more attractive with the knowledge that home remodels are up. La-Z-Boy (NYSE: LZB) is a name that could easily benefit from an increase in homeowner spending. This furniture staple saw a huge uptick in same-store sales in its latest quarterly report (although most of that was due to an extra week in the results) and is currently trading at a forward P/E of just 9.

Another name to consider is Williams-Sonoma (NYSE: WSM). Kitchens and bathrooms are the most common elements of a home to be remodeled, and Williams-Sonoma specializes in culinary equipment. The company has surpassed analyst estimates for 20 consecutive quarters and is poised to grow revenue by the mid-single digits over the next two years.

Foolish roundup
Even the worst situations offer an opportunity for bargain hunters. As long as credit markets continue to stay tight and nearly one-quarter of U.S. homeowners remain underwater on their mortgages, it's likely that the number of remodels will continue to tick higher.

What companies do you think will benefit from an uptick in home remodels? Tell the community by posting in the comments section below, and consider adding Home Depot, Lowe's, Lumber Liquidators, La-Z-Boy, and Williams-Sonoma to your Foolish watchlist to keep up on the latest in the home-improvement sector.