Since the housing market collapse in 2009 the home furnishing players have recovered nicely. Such is the nature of their business that even during the peak of the recession both Home Depot (HD, Financial) and Lowe’s (LOW, Financial) managed to report above 6% operating margins despite a slowdown in sales. The home furnishing industry may not be recession proof, but it is definitely resilient to economic downturns.
Goldman’s research shows that home prices continued to increase near the 5% rate through 2016. Despite contradicting FHFA and Case-Shiller house price indices that showed growth slowing down in the second quarter, Goldman argues that seasonal adjustments skewed results.
If what Goldman shows is true, this is good news for the housing industry. When home prices go up that means demand is getting ahead of supply, and for Home Depot and Lowe’s that translates into a steady stream of customers walking through their doors.
Housing starts refer to the number of new residential projects that have commenced during a particular month, and that fell to 1.14 million in August, representing a 5.8% drop over the previous month. That’s well below the 1.18 million that was forecast for August.
As you can see these two data points seem to contradict each other. On the one hand house prices are going up, and on the other new homes aren’t being started as fast as predicted. The answer to that is in the tightening labor market, not the housing market itself. As demand for labor goes up, wages have to go up, thus creating a shortage and slowing down the overall starts.
“The labor shortage is getting worse as demand is getting stronger,” said John Courson, chief executive of the Home Builders Institute, a national nonprofit that trains workers in the construction field. – Forbes
So there’s a positive side to this apparent problem, and it’s clear that the slowdown in housing starts isn’t a sign of bad things to come as some might assume. The market is doing well year over year, and the forecast remains positive for the rest of the year. The labor shortage might continue to drag housing starts down, but that does not equate to a sharp decline.
The market growing at this steady albeit slow pace means that both Home Depot and Lowe’s will continue to show growth. In the eventuality of a stable market with little growth, there is still enough momentum for both companies to continue to show growth for several quarters.
The worry, however, is that the labor shortage is not a temporary one. Figures from EyeOnHousing show that it has been on the increase for the past five years and has reached an alarming rate of more than 50% across nine key trades.
The site also shows where the shortages are and how bad they are.
Such a sustained and increasing shortage has not been seen in recent years. If the problem isn’t resolved, it could adversely affect all industries related to housing, including home improvement. What it does is force builders to pay more to hire the labor they need, which leads to an increase in home prices and, often, delays in completing the project on time.
Fortunately the problem isn’t across the entire country, just in certain states. However, if it continues, we could see a negative impact all around. As such, this is something I’ll be watching over time and I would highly recommend that investors in industries such as home improvement, manufacturing, financial and wholesale that serve the housing market do the same.
For now, Lowe’s and Home Depot seem to be on safe ground, but that ground could be shifting underneath our feet as you read this. Panic would be overkill, but caution may be the best way forward.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
Start a free seven-day trial of Premium Membership to GuruFocus.
