Housing Cycle Isn't Drawing to a Close

 | Dec 12, 2013 | 7:27 AM EST
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Maybe it's a multi-year move that is not tied to the Fed, but tied to the need for more homes?

That, in essence, is what Home Depot (HD) CEO Frank Blake said last night about why he doesn't think that we are at the peak or even near it when it comes to both his company and the housing-related entities in general.

Home Depot's put more thought into what drives sales than just about any company I have ever seen. Frank and Carol Tome, the amazingly good CFO, have done regression analyses that correlate every aspect of their revenues to gross domestic product, to percentage of growth domestic product spent on homes and to the level of indebtedness vs. the value of a house. The most important lead indicator? The value of a home. If it goes up, then you go to Home Depot to invest in that home.

In this analysis, a home is either a failing or a succeeding business, and if it is succeeding, you want to add to it, just as any rational businessperson would do.

When I talked with him I was all prepared to go over the usual grounds about what happens when the Fed tapers, blah blah blah. But Frank said the determinant isn't interest rates, it's the innate demographic pent-up demand from household creation. We are simply not producing anywhere near the level of homes we need to be able to replace what we are losing and sate the demand for those who are living with their parents.

That, above all, is the reason why he is confident that it's still early in the cycle.

I immediately asked that if that's the case, why doesn't he add more stores in the United States, which is a growth prop that so many analysts secretly wish HD would start doing (they added only one this year, in Williston).

Nope, Frank said, it's what's sold in the aisles. A combination of innovative products -- like the Cree bulb that last 22 years that he says "you have to include in your will" -- a better supply chain that allows very quick delivery, including a $300 million decision to offer same-day delivery in some cities, and better use of the aisle space will get Home Depot exactly where shareholders want it to be.

I know we are in some sort of a funk right now, but I also believe that while we aren't, perhaps, in as early an inning as Frank thinks we are in this cycle, I do think that this top-of-the-ninth feel is just way off base.

If it comes in, you buy it.

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