3 Plays On Ongoing Housing Market Weakness

Includes: HD, LOW, MHK
by: Regarded Solutions

I just opened my latest property tax bill for next year, and I think I am supposed to be happy.

I am absolutely amazed at how far my taxes have fallen in 5 years. They are down nearly 80% to a level that makes the amount almost negligible as a tax deduction! Since I do not have a mortgage, I am basically living in my beautiful home for next to nothing from my perspective.

Sounds good right? Not so fast.

Let's take another look at this from a bigger picture. My situation is not unique, and there are millions of families that are seeing this phenomenon all over the country.

We are also seeing dramatically lower home values, ridiculously low appraisals, and banks that are reluctant to give mortgages to people except under the strictest of guidelines, and even those are difficult to obtain. For those that are lucky enough to purchase a home, the interest rates are miniscule which also has tax implications, meaning that a much lower percentage of that home purchase will be "subsidized" by the current federal and state income tax deductions for property taxes and mortgage interest.

What Does All of This Mean?
It is my opinion that we will never see the housing market return to what it had been from the mid 1950's to around 2005. Never.

I believe that going forward, from here, people and families will purchase homes for vastly different reasons than they have over the last half century. Homes will be purchased to live in, not for a profit to move up to a bigger one, not from a "starter" to a "midsized" to a "dream house", and not as a cash cow because of forever escalating home values, to use as an ATM machine.

The housing market has changed forever, and so will the home buyer.

I will also add that I believe that as the mortgage rates remain low, and more people pay cash or have much smaller mortgages, and property taxes continue to fall, we could very well see the end of those itemized deductions on our tax returns. Without a peep from the real estate lobbyists, OR the home owners of the future. The amount of deductions will be so small that the pain will be minimal and our tax code for home ownership, could change forever as well.

How We, As Investors, Can Profit From This New Paradigm
The dynamics that we will find ourselves in will be somewhat similar to what we faced in the late 70s/early 80s, as well as the mid 90s, but this time it will not revert back to the way it was. In those days, a market was made for "feathering our nests", even for the near term until the market changed, and thus we enhanced the sales value. Now we are moving into a more permanent "nest" that will be "feathered" to live in for the long haul. Not to add resale value, but to add comfort value for ourselves. To add what we want to live with and enjoy for the rest of our lives, and potentially hand down to the next generation.

Sounds familiar doesn't it? It should because when someone bought a home in the early 20th century, that was precisely what they did.

The public companies that will profit from this scenario, can already see this paradigm shift, and are implementing strategies to benefit from this, for the longer term.

Home Depot (NYSE:HD) has revamped their stores and have a completely different persona than they had during the Nardelli days. They are looking for that home owner, right now, that has begun to "feather its nest"

  • HD: $36.39/share, 2.70% dividend yield, reached its high of $68.65/share in 1999 is undervalued in my opinion.

Lowe's (NYSE:LOW) which has not faired quite as well as HD has recently is also cognizant of the new housing market, and is busily revitalizing its stores not just to catch up to HD again, but also to be a major player in "nest feathering".

  • LOW: $21.54/share, 2.60% dividend yield, reached its high of $32.00/share in 2006, and should be on its way to a better future as well.

Mohawk Industries (NYSE:MHK) which is a USA-based manufacturer of a wide assortment of flooring products sold through a vast network of retailers, has brand name products such as, Mohawk, Lee's Bigelow, Karastan, Dal-Tile, and American Olean. With an established management team that has been intact for many years, this company is poised not only for the new feather nesting era, but also for the new home building era, as that returns.

  • MHK: $53.29/share, as of now no dividend, reached its high of $100.00/share in 2007, and has reorganized itself for a dramatic future resurgence, as well as shutting plants and service centers to further reduce costs, is also undervalued in my opinion.

My Opinion
HD, LOW, and MHK are undervalued stocks with strong leadership, strong balance sheets, and impressive pasts, presents, and futures. I believe significant capital gains could be achieved over the long term with these stocks. Please do your own research on each and decide if these stocks belong in your portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.