The market became especially turbulent this week with fears the Federal Reserve is tightening its exceptionally loose policy. The market dropped fast and hard earlier in the week on the news we may see a wind down of quantitative easing as early as this year. However, I remain confident the Fed is going to keep its policies loose in an effort to keep interest rates at generational lows. The "benefits" of quantitative easing may finally be showing face through the rapid expansion of the real estate market. In April, home prices rose 11%, this marks the 5th consecutive month home prices rose double digits year over year. The demand for real estate has been rising at high rates as investors seek to diversify their assets. Investors have accounted for a huge portion of this housing recovery and it was reported that first time home buyers now account for only 29% of home purchases, the lowest share in years. If the Fed were to end its aggressive policies, I believe we would see a double whammy hit the housing market.
First, investors have been pilling their money into the stock and real estate markets as a result of very low bond yields. A return of less than 2% on the 10-year Treasury simply doesn't turn on the average investor. Instead, money that would have conventionally hit the bond market is being pushed into real estate assets. If interest rates were to rise, as a result of tighter policy, the attractiveness of the bond market may rise and cool off the hot housing market. The spread between the yield generated on rental properties and financing rates would tighten, effectively decreasing investor demand for these properties. A decrease in investors demand would drastically decrease the median home price, which currently comes in at $193,000, the highest average in over four years. Second, first time home buyers and non investor-based purchasers would be less likely to make the dive into the housing market as the result of increased borrowing costs. A strong housing market is key for maintaining the economic recovery; it is widely known increased housing activity spurs job creation and aids in the growth of private consumption. Hiring will result from an increase in construction and an increase in property renovation. Private consumption will increase as consumer confidence rises as a result of higher home equity on the monthly statement.
Let's take a look a Home Depot (NYSE:HD), the world's largest home improvement retailer, which stands to benefits from the continuation of the housing recovery. The company reported its first quarter earnings last week where the company reported its sales grew by 7.4% year over year on the back of a strong housing recovery. In addition, the company reported a same store sales increase of 4.3%. Management raised its guidance for the rest of this fiscal year and now expects earnings per share to come in up 17% for the year.
For the first time in the last several years, the growth rate in the pro customer segment outpaced the growth rate in the consumer segment. The company tracks the relative growth rates of the pro and consumer segment, as one indicator of the housing recovery. The pro segment growth rate acts as a leading indicator for the housing market and it is expected the pro business segment will accelerate during the housing recovery. This acceleration is a result of the renovations associated with the rise in existing home sales.
I'm sure most of us are familiar with the term "golden cross" chart technicians use as bullish leading indicator for continued share appreciation. When pro growth rates cross above the consumer segment growth rates, a similar "golden cross" phenomenon historically occurs. As the number of foreclosures and distressed properties come off the market, significant expenditures are necessary for revamping most of these properties. Home Depot is positioned well to take advantage of this spending. Going forward, I expect same store sales and earnings per share to accelerate in tandem with the housing recovery.
The Federal Reserve isn't going anywhere anytime soon as the housing recovery may stall out should interest rates rise. Bernanke knows the housing recovery is a key component of job creation and consumer spending. To take advantage of this recovery, look to the industry leader Home Depot for exposure. Home Depot will see all aspects of its business perform well as existing homes are revamped for rental and new homes are furnished for buyers.