Sometimes you have to dig for good news. The Fed stated recently that the "housing sector remains depressed." The National Association of Realtors reported that existing home sales in May fell short of expectations. There are some nuggets of good news buried in the latest housing data, though. Let's take a look at three encouraging trends and what they mean for housing-related stocks.
Trend No. 1: Higher home prices
How are home prices these days? Like the Jeffersons from the TV show, they're moving on up. Take a look at the chart below.
Source: National Association of Realtors. Change from same month in 2011.
March, April, and May showed solid increases in median existing single-family home prices compared to the same months last year. Three months of gains might not sound all that impressive, but consider this: The last time there were three consecutive monthly gains in home prices was back in 2006, before the housing market plummeted.
While higher prices aren't good news if you're buying a new home, they present good news for the economy. Rising prices mean increasing demand. Since total housing-related spending accounts for around 17% of U.S. GDP, increased housing demand is helpful.
Trend No. 2: Increased housing permits
What about new house construction? There is more encouraging news, particularly in the numbers on housing permits. The first positive is that the bottom appears to be behind us.
Source: U.S. Census Bureau.
The second good sign is that housing permits are clearly trending upward over the past year and a half.
Source: U.S. Census Bureau.
There is still a lot of ground to cover to regain precrash levels. Growth of nearly 38% since January 2011, though, is promising.
Trend No. 3: Narrowing gap between housing permits and completions
One trend that isn't getting much attention is that the gap between authorizations for new house permits and actual completions is shrinking. According to the U.S. Census Bureau, the average time between permit authorization and actual completion of a new house is around eight months. The chart below shows the trends for permits in the time period eight months after they were authorized along with actual house completions for that time period.
Source: U.S. Census Bureau.
If every permit resulted in a completed house eight months later, the linear trend lines on the chart would be identical. Realistically, though, some permitted houses are never built and construction of others is delayed considerably.
Why is this narrowing gap encouraging news? Permits by themselves don't mean much. Only houses that are actually built energize sales of construction materials and home products. If the likelihood that permits turn into real houses is increasing, that bodes well for housing-related sales. And that likelihood is on the upswing.
Potential picks
There are plenty of companies that would benefit if the trends discussed above portend a more robust housing market. Three companies with attractive valuations that potentially stand to gain are pigment producer Kronos Worldwide (NYSE: KRO), home improvement chain Lowe's (NYSE: LOW), and flooring company Mohawk Industries (NYSE: MHK).
Kronos is a leader in production of titanium dioxide, which is a pigment used to whiten a variety of products including paint. Higher numbers of new homes being built should increase the demand for paint. More paint means more need for pigment. Kronos has around 17% market share in the U.S. and should benefit from an increase in pigment demand stemming from new home construction. The stock trades at a low P/E around 5.
An increase in the number of homeowners fixing up their homes for sale should help Lowe's. The large home improvement chain is undergoing something of a corporate remodeling after lackluster 2011 results. Lowe's had a decent quarter recently with earnings growth of more than 14%. Its stock has a forward P/E of 12, which is on the low end of its five-year P/E range.
Mohawk sells a range of flooring products including carpets, ceramic tiles, hardwood, and laminates. The company benefits both from new home sales and existing home renovations. Earnings growth for the last quarter was more than 72%. The stock's price/earnings to growth (PEG) ratio stands at 0.77, which represents an appealing valuation.
Bad news, good news
The bad news is that macroeconomic conditions could change the outlook for housing. People need jobs and confidence for the future to invest in building new homes. However, the unemployment rate remains stubbornly high and consumer confidence has declined for the past two months.
For now at least, the positive housing trends are in place despite these negatives. Investors should monitor one other trend -- new housing starts. If these numbers keep chugging along, the potential picks mentioned earlier should be smart buys.
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