Sometimes I feel like there's the real world and there's the stock world, and they can radically diverge for a time because of raw emotions and fear.
Take housing. One of the great underlying theses of this market is the rising price of a home and the desire to invest in your house in order to improve it.
Housing, as I like to say, punches above its weight, meaning that while it's only about 10% of the U.S. economy, it has ripple effects all over the place, including retail, banking and real estate sales and servicing, from title insurance to document processing.
When you look at a market that's dominated by worries about China, the proximate cause of this downturn -- even if you think it's exacerbated by Federal Reserve indecision -- you search for bullish portions of the market to take advantage of the flow of funds out of suspect areas and into positive ones. For example, a portfolio manager looking at the world would most likely want to underweight or have fewer stocks linked to minerals and resources or international trade and overweight stocks more close to home, or specifically the home.
Because we know household formation in this country, after being well below normal on account of the Great Recession, has picked up nicely, so there is a secular trend that can stay in place for some time. Household formation is difficult to reverse.
Further, we know that because of the Great Recession there had been a dramatic decline in the number of housing starts to levels not seen in the last 50 years, a pace of about 500,000 starts, down from 2.1 million in 2005. What a plummet.
This year, the country's on pace for 1.2 million housing starts, which is still below the historic norm of 1.5 million to 1.6 million, according to Bob Toll, executive chairman of Toll Brothers (TOL), who gave us those statistics on his recent conference call.
Which brings me back to the real world. In the last 24 hours, we have heard from two companies in the thick of the housing thesis: Best Buy (BBY) and Toll. Now, while some analysts found Toll's numbers disappointing relative to Toll's expectations, Best Buy performed much better than analysts expected, with comparable stores gaining 3.8% when analysts were looking for 1%. More important, though, was the commentary about overall housing and housing-related demand, and it was stunning.
Here's a typical quote from the Best Buy call: "Our first observation is that overall consumer demand for technology products and services, including appliances and mobile phones, is growing." CEO Hubert Joly goes on to say it is being driven by big themes like "population growth, the housing recovery and healthy living trends that are driving momentum in our appliance, home theater, connected home and health and wearables businesses, which we believe will remain positive catalysts in quarters to come."
Doug Yearley, CEO of Toll, echoes that analysis, saying in his call, "The housing recovery appears to be built on a very solid foundation. We believe that the slow but steady acceleration we in the industry are experiencing bodes well for the long-term health of the housing market, based on increasing household formations, pent-up demand and the current industrywide production that is still well below historic norms."
Bob Toll himself then said, "An improving employment landscape, three consecutive quarters of accelerating household formations, pent-up demand, increasing rents and still-attractive affordability are supporting the for-sale market's steady recovery. As the job picture continues to improve, greater demand should lead to rising home prices, which we believe should encourage more people to sell their existing homes and move up or add a second home." Toll continues, "Based on these and other factors, we believe the housing market remains on an upward trend and has considerable room to grow."
These three are all seasoned professionals who lived through the housing downturn. None was known as a bull during the bad old days.
My conclusion: Despite the slamming that Toll took yesterday, these two companies reaffirm that this is the place to be even if we get a small rate hike. The forces are in place for a multiyear move despite what the stock market might be saying. It's a terrific sector to buy on any weakness, like we seem to get these days as a regular occurrence.