In my first blog about Valspar, found here, I stated that part of my optimism for the stock was motivated by an improved U.S. housing market. With a slew of economic housing data recently released I decided to revisit my investment thesis.
As we all know the harsh winter has caused many economists to brush off any negative economic indicators. While such a casual dismissal of all bad economic indicators may not be prudent, it would be expected that housing data may be negatively affected by the weather. However, the recent housing data has not been all bad.
Recently released Commerce Department data show that single-family new homes sales reached its highest peak in 5-½ years in January. Many bears focused on projections for January new housing starts which show a major decline from December. This decline, however, should be taken in context. For the first 10 months of 2013, new housing starts averaged 900,000 before jumping up to over 1,000,000 in November and December. A steep decline from these highs should not cause alarm, especially considering the harsh winter. Other fears for the housing market include rising home prices and a lack of supply.
Home prices rose by over 11% in 2013 according to the S&P/Case-Shiller Home Price National Index. Combined with sluggish wage growth, some economists view rising home prices as a potential head wind. The low supply of homes on the market is also described as a potential head wind. I view rising home prices as something that can fix the supply shortage.
With many homeowners still under water from the housing collapse, rising home prices will allow many homeowners to again have equity in their homes. This can be seen from the fact that new home equity credit line borrowings soared by 42 percent in the final three months of 2013. This increase in equity will allow those homeowners who could not afford to sell their homes to enter the market. The supply shortage will actually be fixed by rising home prices.
Overall, I see the housing market continuing to improve through 2014. Raising rates may cause some pauses in the housing market, but rising home prices will help to alleviate the higher rates. Rising home prices will also fix the supply shortage. Owners that now have equity in their homes will be able to sell or begin a renovation project. For the reasons I outlined before, I believe Valspar is in an excellent position to benefit from an improving US housing market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.