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Back in the Black for U.S. Housing

Posted Dec 6, 2017, 04:48 PM | By James Virgo

I remember when the U.S. housing market infamously collapsed during the global financial crisis nearly a decade ago. Subprime mortgages and overextended homeowners led to sweeping foreclosures across the country. Like many Canadians, I was tempted by the opportunity to purchase U.S. property for investment, vacation and/or retirement purposes—especially since the Canadian dollar was at par at the time.

Housing prices have recovered and then some

According to the S&P/Case-Shiller U.S. National Home Price Index, average home prices peaked in August 2006, followed by the well-publicized decline that saw the Index lose over 27% of its value by February 2012. Less newsworthy, it seems, has been the sharp recovery that followed. By November 2016, average prices had recovered to 2006 levels, and are now rising faster and higher.

According to the U.S. Census Bureau, new home sales increased for three straight months leading into November 2017, including a 6.2% jump in October. Existing home sales also rose in October by the most in eight months, says data compiled by the National Association of Realtors. An even more important indicator is the number of properties sold on which home construction has not yet started. That measure reached its highest level since January 2007, signaling that residential construction will likely speed up in the coming months.

A healthy housing market is an important driver for the economy

Am I surprised about the rebound? Not really. We know the U.S. economy is expanding, albeit slowly. Conditions for home ownership remain positive, such as high employment and steady hiring, easier credit availability, and borrowing costs that remain historically low. At the same time, investment in private residential property as a percentage of GDP currently sits below its historical 4.6% average – a gap that seems likely to be filled. It’s not a perfect picture, especially for younger buyers and those entering the market for the first time, but the turnaround is an encouraging development with broad implications.

A healthy housing market becomes an important driver for the U.S. economy. As homeowners see their home equity grow, they feel more relaxed about expanding their consumption, which will stimulate the economy. Since consumer spending is responsible for about 70% of GDP in the U.S., the “housing effect” lends meaningful support to the national economic outlook. Furniture and home furnishing sales alone show an accelerating uptrend, rising faster than overall retail spending. Year-to-date growth in this retail segment is currently 4.4%, surpassing the 4.0% rise recorded by the end of the first quarter of 2017.

Home Depot: Home improvement retailers win…

As investment managers, MD finds opportunities by recognizing the industries and companies that will benefit most by strong uptrends.

A sizeable chunk of consumer spending associated with a growing U.S. housing market is directed toward home improvement retailers like The Home Depot, Inc. Home improvement shoppers still prefer the in-store experience, so Home Depot has been somewhat resilient to the “Amazon trend.” That's especially true for professional builders, where Home Depot has been focusing its efforts to great success.

During the last five years of the housing recovery, Home Depot stock has returned 207.3% compared to 107.7% for the broad S&P 500 Index. Earnings per share has risen from $3.00 in 2012 to an expected $7.38 for 2017, and is forecasted to hit $8.35 for 2018. Dividends have grown by 22% (annualized) over the past five years, and net debt is low. Home Depot is currently held in the MDPIM U.S. Equity Pool and the MD American Growth Fund.

…as do construction materials suppliers: Vulcan Materials

Another housing-related holding in the MDPIM U.S. Equity Pool and the MD American Growth Fund is Vulcan Materials Company. Vulcan is the country’s largest supplier of construction aggregates such as ready-mix concrete and asphalt—materials needed in all types of construction from large infrastructure projects to residential homes. The company’s stock has returned 41.5% more than the S&P 500 Index over the past five years. Although Vulcan’s dividend yield is an unimpressive 0.8%, dividends per share has spiked from just $0.04 in 2012 to an expected $0.99 in 2017. With greatly improved revenue and reduced debt, Vulcan is well positioned to benefit from rising demand in the recovery.

While there are many interrelated factors that go into picking a stock for our investment pools and funds, the initial attraction is often a good story like the one currently underway in the U.S. housing market. The fact that this good news story has been somewhat “under the radar” can also help with entry prices in some cases. On a personal note, I missed the opportunity to profit from discount property in 2009—I looked long and hard at places in Phoenix and Las Vegas. However, it’s nice to see MD client portfolios benefit from the recovery of the U.S. housing market, doing its part to push the U.S. economy forward.

About James Virgo

James Virgo, CFA, CFP, MBA, is Vice President and National Lead with MD Private Investment Counsel at MD Financial Management. He oversees the practice of investment counselling and delivery of investment advice across MD PIC.