Big Box Home Improvement Stores Should Benefit from Government Mortgage Subsidies

Yesterday, I attended a poorly-attended but information-rich real estate conference hosted by a major Title agency and regional bank. Armed with the latest statistics and purchase incentives provided by government agencies, the mood was grim for existing home sales and bright for vulture capital snapping up foreclosures and short sales. Prices are drifting lower but showing some stabilization. Credit is tight and almost impossible to obtain with a credit score of less than 625. Cash is King. With excellent credit, mortgages can be had as low as 4.5%, 30 year fixed.

From an economic standpoint, the recent stock market rally may well be a bear market trap. So many negative variables are in play such as unemployment, poor credit scores preventing bank loans, fear of inflation within a recession due to government debt at all levels, worldwide chaos, etc. The available stock of housing is large and to a significant degree being low-balled by short term speculators which invites schemes and questionable business practices for aspiring homeowners. On and on the list goes, yet there is one area that transcends all of the above: readily available home repair stores.

Big box discount home improvement stores such as Home Depot (HD) and Lowe's (LOW) remain the property speculator's choice for cheaply renovating homes and small multi-unit residential properties for a quick turnaround. Grants to keep people in their homes from the government such as mortgage subsidies in various forms free up cash to fix up homeowner dwellings. And homeowners are taking advantage of this gift. Home Depot and Lowe's are the first place to visit to get that $20.00 faucet and $1.00 per piece tile. Re-habbers bulk up on discounts (usually ranging from 7-14%) off already cheap prices by designating themselves as contractors.

Take it from me. You can build an entire home using either Home Depot or Lowe's products. Even better, Home Depot runs the Home Depot Supply, their 1200-page catalog and online contractor direct-to-jobsite service for bulk purchases and even lower prices.

All roads lead to Home Depot and Lowe's because regardless of who is buying what, and for what motive, properties need to be repaired or rehabbed and the cheap and convenient route is through these two stores.

Lowe's is trading around $19.00/share with a p/e of about 13. Lowe's has an excellent portfolio of goods in store and online and features many non-contractor items that appeal to women. This is by design, and has made the Lowe's stores an attractive haven to shop.

Home Depot is trading around $24/share with a p/e of about 17. Home Depot has made great strides since being almost ruined by former CEO Bob Nardelli. Informed customer service is back, stores are cleaner, product lines are better, in some respects, for contractors than Lowe's and attention to the needs of the home remodeler has improved significantly.

If I was forced to choose between HD or LOW, I would buy HD, but would be happy owning both, as well as other building material outfits such as US Gypsum (USG) and Sherwin Williams (SHW) .

If you believe we are headed for a depression, do not buy these stocks. If you believe that a lot of money is going into fixing up properties, HD and LOW may provide surprisingly solid returns.