C.J. Lawrence Weekly Market Comment – Supply-Demand Imbalance Bodes Well for Rebound in Housing Related Stocks

Estimates of U.S. Households[/caption]Wednesday’s dramatic decline in Facebook’s share price overshadowed another significant sell-off in a housing related stock.  Shares of Mohawk Industries (MHK) declined 17.5% in Thursday’s trading session after the company reported 2Q18 results that fell short of analysts’ expectations, and management indicated that margin pressure and slowing sales growth would likely persist for the balance of the year.  The manufacturer of industrial and residential flooring products also noted that North American sales growth was not keeping pace with raw material cost inflation. Similar circumstances were cited in the 2Q18 results for Fortune Brands Home and Security (FBHS), which manufactures doors, plumbing supplies, and cabinetry.  Despite the strengthening economy, the homebuilding, building products, and household furnishings groups are among the worst performing S&P groups in 2018.

The lackluster price performance of these groups is at odds with an improving domestic economy and low unemployment.  That backdrop has historically been good for housing construction and viewed as a catalyst for increased supply.  But housing construction fell in June as single-family and multi-family starts declined by 12.3%.  Housing permits, an indicator of future activity, also fell in the period, pulled down by a plunge in multi-family permits. Overall, housing construction and permits have been slowing at a time when demand for housing is growing.  The lack of new supply helped push the median sales price of existing homes up 5.2% in June.

There are, however, some recent signs that the new housing pipeline will build in the back half of this year.  Last week’s housing report from the U.S. Census Bureau, showed a 2.2% increase in home completions in June versus last year’s level, and indicated that the number of housing units currently under construction increased by 4.9% on an annual basis. Additionally, construction labor, which saw an increase of nearly 4,000 residential construction jobs between May 2018 and June 2018, supports further improvement in the pace of home-building, and signals that housing construction is likely going to increase in the months ahead.  The growth in the pace of housing completions, now at a 1.26 million seasonally adjusted annualized rate (SAAR), suggests that the U.S. housing market remains under-supplied and is only inching its way back to balance.  At the same time, millennials are entering the housing market at a rapid pace, household formation is accelerating, and baby boomers are living longer and more independently than previous generations.  With that backdrop, builders and suppliers will remain under pressure to keep up with the growing demand.  That bodes well for these out-of-favor groups.

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