As homeowners wait for this harsh winter to pass, some are undoubtedly already thinking ahead about new projects to take on once the weather warms up. Activity for both new and existing homes have been somewhat encouraging in recent quarters. As the U.S. housing market continues to chug along, the retail home improvement industry should encounter solid demand over the foreseeable future.
Housing figures
Preliminary February housing starts came in at a 17% sequential drop from January’s revised figure. Compared with February in the previous year, new housing starts were off as well. While at first blush, the figure is disappointing, the setback was likely heavily weather related; and should probably rebound in the coming months. Too, building permits, which are a even more-forward looking indicator of fufutre construction, remain near a multiyear high.
Meanwhile, existing home sales for January 2015 improved 3.2% from the same month in the previous year while median prices rose 7.5%. Low inventory conditions have contributed to the rise in unit sales and average sales price. Renovations should see a seasonally adjusted uptick as potential sellers look to take advantage of the situation.
Although macroeconomic concerns over global trade currently exist, the domestic housing sector ought to encounter a somewhat favorable recovery. Winter-related slowdowns notwithstanding, the home improvement business should benefit from positive momentum.
Do-it-yourself continues to expand
The do-it-yourself (DIY) movement continues to grow in popularity as people look for ways to stretch their dollars and feed their home-improvement appetites. Indeed, HGTV, owned by Scripps Networks Interactive (SNI), became a top 10 cable network in 2014. Furthermore, growing accessibility of the Internet has empowered people with how-to guides on a wide variety of DIY projects.
Among these, hardwood flooring is a popular choice for ambitious DIYers. Many homeowners have turned to this upgrade as a way to enhance the resale value and general appeal of their properties. Lumber Liquidators (LL) is a retail chain that specializes in hardwood flooring. This once high-flying stock encountered some trouble in 2014, but the company is hopeful that its recently relaunched flagship Bellawood collection will help turn things around.
Another interesting retail building materials company is Tile Shop (TTS), which offers a wide assortment of tiles and natural stone. This embattled company has seen its stock price plummet greatly in the past year and a half. In addition to weak performance, accusations of impropriety in dealing with overseas suppliers have undoubtedly shaken investor confidence. Although Tile Shop has recently made changes to its top leadership and instituted new internal controls, the company still faces an uphill battle.
Competitors to these specialty retailers include giants such as Home Depot (HD) and Lowes (LOW). Home Depot caters more to professional builders, but it is also a top choice for many DIYers due to its wide geographic reach and extensive inventory.
Overall, the DIY movement has been very successful in the West, but demand has thus far failed to materialize in Asia and emerging countries. As labor costs rise over time, however, this ought to eventually change. Many of these retail building supply companies have high hopes for foreign expansion opportunities, but Home Depot’s well-publicized exodus from China has undoubtedly made some of them a bit gun shy.
Millennial demand over the long term
Another important factor to consider is the Millennial generation’s record low rates of home ownership. The media has reported extensively on this phenomenon, and explanations have placed the blame on stricter lending standards, high levels of student debt and also uninspiring employment prospects in recent years due to global macroeconomic weakness, though we have seen notable job creation over the last 12 months. Moreover, this generation tends to prefer convenient but costly urban neighborhoods, where only rental properties are feasible.
That said, Millennials should still have a positive impact on home improvement retailers over the long haul. Although home ownership for this cohort is at a historical low, rates ought to eventually rise as more Millennials get married and look to start a family. Rising demand for existing home sales ought to fuel an uptick in renovations by both sellers and buyers.
Additionally, many landlords are updating existing properties so that they can attract and retain young professionals, a demographic that is more likely to pay higher rents for premium accommodations as they near their peak earning years. Apartment REITs, such as UDR (UDR, Financial), have embraced this strategy with much success. At the moment, Millennials seem to be marching to a different timetable than their predecessors, but this will likely change over time.
Looking ahead
Empowered by internet technology, the DIY culture has embedded itself in modern society. Moreover, as Millennials increase their participation in the housing market, home improvement retailers should see a nice boost from both professional and casual renovators.
Retailers operating in the home improvement space ought to experience solid demand in the coming years. With multiple catalysts for long-term growth, additional upside is possible, though high valuation levels are a real concern. Some of these stocks have made considerable gains in recent quarters, but those expecting a sharp pullback may be disappointed.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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