Saturday 15 December 2018

Homebuilder woes spells good news for DIY chains

The continuing shortage in the supply of new homes in the US has proven to be a boon for major DIY retailers such as Home Depot
The continuing shortage in the supply of new homes in the US has proven to be a boon for major DIY retailers such as Home Depot

Matt Townsend and Prashant Gopal

Soaring lumber prices, rising mortgage rates and a dearth of skilled workers are a triple threat looming over the housing industry right now.

That spells bad news for homebuilders, but not for home-improvement chains.

That's because anything that slows production of new homes - like an industry labour shortage - should increase demand for existing ones, and, in theory, boost their values.

Rising home prices convince people to see their residences as investments and make them feel better about renovating a bathroom or adding a patio to the backyard with the help of DIY providers such as Home Depot Inc or Lowe's Cos.

"We don't build houses, and we don't really plan to sell to people buying newly-built homes," Home Depot Chief Financial Officer Carol Tome said in a recent interview, citing the 123 million occupied homes in the US that far exceed the approximately one million housing starts expected this year.

"What matters is the occupied housing base. That's a lot of households for us to sell to," she said.

Inventory constraints in the US housing market are only getting worse, with millennials increasing demand by settling down and having kids, after waiting longer than previous generations to start families.

Home Depot tracks the percentage of young adults living at home, and it peaked at 32pc in 2016 and is now declining.

"For the first time in a long time, this trend is actually reversing," Richard McPhail, Home Depot's senior vice president of finance, said during a presentation earlier this year. "They're moving out and creating households."

But there aren't a lot of empty homes just waiting to be bought.

In April, there were four months of supply out there in the US - back to the pre-recession levels of the housing boom. In many of the hottest markets, such as San Francisco and New York, there is much less inventory, partly because of stricter zoning laws and a lack of space.

A lack of skilled workers continues to slow down the home-building industry.

Toll Brothers Inc, the biggest producer of luxury homes, last month saw its stock fall the most in almost a decade, and an index of home builder stocks has plummeted this year, even as the broader market - including Home Depot and Lowe's Cos - has gained.

Fewer new homes means people are staying put longer. The age of the US housing stock is only getting older, which leads to more repairs and trips to Lowe's and Home Depot, which have about $170bn (€145bn) in combined annual sales.

In 2016, 51pc of US residences were more than 40 years old, up from 40pc in 2005, according to John Burns Real Estate Consulting.

What it all boils down to is higher home values are the most important indicator of home-improvement store performance.

Robert Niblock, who's retiring this summer after 13 years as chief executive officer of Lowe's, reiterated that point during his final conference call with investors.

"The home improvement industry is poised to grow its share of overall consumer spending," Niblock said.

"Housing is expected to remain a positive driver, as demand in excess of supply drives home price appreciation."

Young Americans leading the chase for fewer homes

Young Americans are hitting more and more homeownership roadblocks: crippling student debt, escalating home prices, surging mortgage rates and a scarcity of listings.

So why have they gone on a buying binge?

First-time buyers accounted for 46pc of new mortgages (excluding refinancings) that Freddie Mac backed in the first quarter, their biggest quarterly share in data going back to 2012, according to the company.

Meanwhile, the National Association of Realtors puts the median age of first-time buyers in the US at 32.

In other words, it appears that young people, helped by easier credit and an improving job market, are acting fast as rents rise and a surge in property values and borrowing costs threatens to price them out of home ownership.

The sheer size of the generation means a lot of mortgages, Freddie Mac Chief Economist Sam Khater said.

"This is a millennial-driven rise," Khater said in a phone interview.

"You've got a strong economy that's helping, along with the appetite of the financial market to invest in mortgages."

So while it's a tricky time to be a young homebuyer, it might be a good one compared with next year.

According to data from the Census Bureau, new homes in the US have a median price of just over $312,000 presently - steady with April 2017's numbers and the lowest point in the last year.

Realtor.com's chief economist, Danielle Hale, pointed out that some new homes are even more affordable, with 5pc listed under $150,000. It's the largest share of new construction properties in this price range since 2016.

"This could be a sign that builders are trying to build at lower price points," Hale said. "The largest share of home buyers and home shoppers in the market are looking to buy entry-level homes."

For buyers on a budget, buying an existing home may still be their best bet however.

Despite hitting their lowest point in the last year, new construction properties are priced 24.8pc higher than the average existing home, which comes in at $250,400.

According to Realtor.com, the extra costs come from "pricier finishes and appliances" and the lack of wear and tear on new homes.

It could also be due to a lack of supply. The number of new homes sold and for sale dropped 1.5pc in April.

As Len Kiefer, Freddie Mac's deputy chief economist puts it, "The absolute level of [new home] sales remains quite low compared to current demand levels and the overall population, but you can't sell what hasn't been built." (Bloomberg)

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