A touch of pessimism has crept back into the market about the health of the U.S. housing market. It is largely unfounded, however, judging by comments from key housing executives this earnings season.
Doubts on the extent of the housing market recovery stem from a disappointing June new home sales report: Sales declined and missed consensus expectations. Prices for new homes fell 1.8% on a year earlier and the prior month's sales were revised lower. Although the report came in the middle of a typically strong summer month, I would not read too much into it, given other trends in the market.
For example, building permits are at an eight-year high. Starts in June touched the highest since November 2007. Existing home sales grew at the fastest pace in over eight years in June. Importantly, median prices grew to a record high, which could spur further home-improvement investment -- and more consumer spending this holiday season.
But it is the comments from housing execs that have me convinced that related stocks have further room to run this year. There is a sense of optimism in the sector that hasn't really existed in the past two years. On the conferences calls that I have listened to, not one of the executives is spewing caution. They are delivering very solid results -- on the back of jacked-up estimates by Wall Street -- and, consequently, I believe their outlooks, and company stock gains, are trustworthy.
Here are some of the executives' comments:
D.R. Horton (DHI): Bill Wheat, EVP and CFO
The consistency in our gross margin in the first three quarters of the year reflects the stability of most of our markets today and the normalization of housing market conditions we have seen over the last year. We are raising price or reducing incentives, when possible, in communities where we are achieving our target absorptions, and we are working to control cost increases.
Masco (MAS): Keith Allman, president, CEO and director
Milgard Windows, the leading window brand in the Western United States, had a tremendous quarter. They continued to capitalize on improving market dynamics, including new home construction growth, repair and remodel growth and increased demand for their higher-end offerings, including their recently introduced Athens stores.
We continue to experience growing demand for our new home construction and repair and remodeling products, including our big-ticket kitchen and window products.
Whirlpool (WHR): Jeff Fettig, chairman and CEO
We continued to see strong, sustained demand in U.S. housing. I wouldn't see any sign [that] makes us change our opinion compared to what we've said several quarters ago.
Owens Corning (OC): Mike Thaman, chairman and CEO
Roofing experienced strong shipments and improving margins throughout the quarter. Insulation continues to make progress -- with growth expected to accelerate in the second half on the recent improvement in U.S. housing starts.
Sherwin Williams (SHW): Robert Wells, SVP, corporate communications and public affairs
Three more years to this recovery to reach a peak is certainly foreseeable.
On the repaint side, not just the homes that are being put in place -- the existing homes that are trading hands -- but also the overall appreciation in home values that we've seen in the markets should drive remodeling and repaint activity in the outyears.
Stanley Black & Decker (SWK): John Lundgren, chairman & CEO
We also believe sell-through in the hardware, lumber store and staff channels was very strong, as both residential and non-residential markets -- construction markets -- benefited from good growth in end-user demand. We're seeing more end users: we're seeing both online purchases, purchases through the two-step channel [and] professional purchases through the big box, all good.
I think it's quite telling on the industry's fundamentals that the sector has trade very resiliently during recent market volatility. Moreover, keep in mind that the Fed sounded more bullish on housing in its statement this week, something that, indeed, got lost in the sauce. All signs point to another better-than-expected quarter of sales and profits from Home Depot (HD) next month.