Home Remodeling Holds Potential for Investors

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Includes: BLDR, FAST, HD, LOW, SHW, SWK, XHB
by: Hans Wagner

The home improvement and remodeling industry will be the darling of the housing sector in 2010. The plunge by the housing sector took the home improvement industry with it as it fell more than 30 percent from its peak in 2007. It looks like the home improvement industry will bottom in the first quarter of 2010 and then rise from there.

As homeowners recover from the devastation of the credit crunch, they are looking to increase their spending on their existing homes. Should existing home sales rise, it will add to the spending by homeowners on up grading their homes. Even the growing number of foreclosures will contribute to the home improvement and remodeling industry as the new owners spend some money to increase the value of their new purchases.

Harvard University’s Joint Center for Housing Studies expects homeowners to spend $104 billion at an annualized rate in the first quarter of 2010. From that low point in the current cycle, they are looking for spending to rise to $110.9 billion by the third quarter of 2010. Moreover, the Center expects year over year growth by the end of 2010 and into 2011.

Home Improvement Trends

Drivers for Increased Spending

Many homeowners are planning catch-up as they begin improvement projects they postponed earlier. Projects will cover the scope from painting a room to a total remodel of the kitchen. In each case, homeowners will spend more money to upgrade the value of their home.

The growing number of foreclosures is contributing to the higher spending on home improvements. Many foreclosed homes are in disrepair and require substantial improvements to make them livable. The new owners will be spending substantial sums to bring the homes up to code and to improve the value of the property.

Should the Cap and Trade bill pass as it now stands, there will be requirements for homes to reduce their carbon footprint with better insulation and appliances that consume less energy. Upgrades to heating and cooling systems will also be part of the new rules.

As the economy struggles to generate enough jobs, the President and the Congress may create another jobs stimulus bill. This new bill is likely to have money for home improvement such as insulation, window coverings new windows, low energy use appliances, etc. to create jobs and reduce the carbon footprint of a home.

Finally, should the sale of existing homes rise, the new owners will spend more on improvement projects. Many new homeowners complete some improvement project within the first six months of their occupying the home.

Investing Opportunities

This spending will drive up the sales of suppliers and manufacturers of home improvement products. Investors should look to the home improvement retailers and manufacturers of housing materials from paint to appliances and tools.

Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) will benefit as remodeling contractors and homeowners increase their purchases of lumber, sheetrock, paint, cabinets, and appliances. With the revitalization of Home Depot, the company should see margins improve as sales begin to climb.

Suppliers of tools like Black and Decker (BDK), and Stanley (NYSE:SWK) should see their sales turn up as well. Paint supplier Sherwin Williams (NYSE:SHW), fastener manufacturer Fastenal, and structural manufacturer Builders FirstSource (NASDAQ:BLDR) will benefit as well.

Even the housing sector Exchange Traded Funds (ETFs) such as the Home builders SPDR (NYSEARCA:XHB) could see an up trend, though they have a substantial holding of home construction firms that will continue to struggle in 2010.

Buying into the home improvement sector at the bottom is a low risk opportunity that should pay off in 2010 and 2011 as homeowners spend on their most valuable asset.

Disclosure: No positions