The housing market has a disproportionate impact on the U.S. economy. That's because so many things go into building a house and turning it into a home. Investors will want to watch companies like home builder NVR (NYSE:NVR) and lumber company Weyerhaeuser Co (NYSE:WY) for a housing recovery, but you should also keep an eye on retailers like Home Depot (NYSE:HD).
When it comes to building a house, there are a few big names. NVR stands out because it makes use of land options to assure it has plots on which to build; competitors usually buy land directly. NVR's asset-light business model played out very well during the housing-led 2007-2009 recession, when it was able to remain profitable while many of its peers dipped deep into the red. Essentially not owning land allowed NVR to avoid the pain of falling land prices that hit hard at competitors. A housing upturn is great, but knowing you have some downside protection in a cyclical industry is good, too.
NVR builds under the brand names Ryan Homes, NVHomes, Fox Ridge Homes, and Heartland Homes. It has operations in 28 metropolitan areas in 14 states and Washington, D.C., building everything from town homes and condominiums to houses. It also runs a mortgage business to support the sales of its homes.
That said, NVR operates mostly on the eastern side of the country, which could limit long-term growth if housing demand in the Sunbelt continues to grow greater than in other regions. However, that's a really big-picture consideration; NVR is still positioned to benefit from a housing recovery right along with its peers.
The biggest drawback of NVR may actually be its share price, which is well over $1,500. That's kind of steep, and it might deter some potential investors. But based on its showing during the recession, a share of NVR could be worth every penny.
Trees and lumber
You can't build a home without lumber. And that's where Weyerhaeuser, a real estate investment trust (REIT), comes in. This timber company owns roughly seven million acres of woodland in the United States and manages 14 million more in Canada. From this land, it harvests trees for sale, produces lumber, and makes fibers.
Demand from the homebuilding market tends to be the driving force for Weyerhaeuser's top and bottom lines. For example, lumber makes up around half of the company's top line. Log sales, which often get turned into lumber somewhere else, make up another 20% or so. So, a housing market upturn will definitely have a big impact on Weyerhaeuser.
That said, the rest of its business (roughly 30%) is in fibers, a sector that dances to a different drummer. Fibers, which get used in things like diapers, won't stop a housing downturn from pulling Weyerhaeuser's bottom line into the red again, like it did during the last downturn. But the segement will at least provide a modest offset.
Fixing things up
Clearly, a housing upturn will help companies connected to building homes, but it should also help those associated with fixing up existing ones. The big name here is retailer Home Depot, which serves the do-it-yourself market and contractors.
Essentially, if the housing market is strong enough, people looking to move will want to spruce up their old home for sale. And anyone who's bought an older home will likely come in and make changes such as painting the walls, laying down new flooring, and upgrading electrical systems and plumbing. Home Depot and a number of other retailers sell the supplies needed to do these things.
However, as a retailer, Home Depot is subject to different investment considerations than an industrial company like NVR. A really big one to watch is same-store sales. This metric looks at the sales performance of stores open for at least a year, striping out new stores that can mask weak trends at the existing store base. You'll also have to think about things like customer service, location, margins, and product pricing compared to competitors.
That said, Home Depot weathered the 2007-2009 recession without falling into the red. That's because it's tied to the housing market, but it has a broader business -- even in a downturn, some repairs just have to be made. And if you can't buy a new home because the housing market is in the dumps, you might opt to fix up your old one. Still, if there is a housing recovery, Home Depot and similar retailers should see a business uptick, too.
When housing is on the mend
If you are watching stocks for a housing recovery, you'll want to focus on some of the obvious areas. That includes home builders like NVR, industry suppliers like Weyerhaeuser, and also retailers like Home Depot that are tied to the housing market. Just remember that the housing market is highly cyclical, so what goes up will likely come down at some point. That's why you'll probably want to consider what happens in an upturn, but also what might happen to your investments here during a downturn.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.