Investing In The Non-Real Estate Housing Recovery

By James Brumley | April 08, 2010 AAA

It's official - the economy is moving towards a healthy (relatively) recovery, but it's not bringing the real estate market along for the ride. That's great news for some stocks in the house and home sector (if you use the term loosely), yet bad news for others.

The company-specific picks and pans are below. First though, let me tell you where I'm coming from on the economic side of the equation.

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Just the Facts
You can expect the occasional economic oddity every now and then, but when the oddity persists across the board for two more months, it's no longer an oddity - it's a trend.

Of course, nobody said one trend had to be consistent with another.

Take consumer spending, for instance. It's been up five months (month over month), while personal savings rates have fallen for the last two - evidence that the spending mentality has already started to replace the short-lived saving mentality. Of course, none of this should come as a major surprise, as the credit spigots were finally turned on in January with the first increase in credit available in more than a year.

Funny thing though - ridiculously low interest rates and more credit availability has yet to help the one arena that they were designed to help the most - real estate.

On the Other Hand...
Existing home sales were down in February. So were new homes sales. Both have been trending lower - again - for months, despite the first-time buyer tax break. New home sales hit multi-year lows in February, too.

To make matters worse, housing inventory is on the rise again - perhaps what the so-called phantom inventory pundits were worried about.

The really interesting piece of data, however, is the median sale price for the fewer homes that were sold in February. At $165,100, we're just off of January's multi-year low, and a hair under last March's median home price of $170,000, which was at a point in time when an economic recovery was the farthest thing from anybody's mind. Now, after real signs of economic life and the revival of credit, we can't get real estate going again?

I think it's time we start accepting the idea that the real estate market just isn't going to recover anywhere near as firmly as the rest of the economy seems to be.

Winners...
Consumers are spending on houses again; they're just spending more on what goes in their houses, and less on the property and structures (a much more feasible way to upgrade without a bigger mortgage bill).

This trend has been a boon for the likes of Williams-Sonoma (NYSE:WSM), and Kirkland's (Nasdaq:KIRK). Williams-Sonoma saw last quarter's revenue improve by 8%, while earnings (thanks to a low comparable) were higher by more than 600%. Kirkland's saw nearly a 50% increase in last quarter's profit, on a 7% improvement in sales. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks).

It's not just home-décor stores on a roll now, however. Any retailer that can help make a home better/nicer on the cheap has a shot at posting positive surprises.

Fabric retailer Jo-Ann Stores (NYSE:JAS), for instance, posted a 4.4% bigger top line last quarter than the same quarter a year ago, with a commensurate increase in earnings. Though the numbers haven't hit a reported bottom line yet, Ethan Allen Interiors' (NYSE:ETH) CEO Farooq Kathwari says January's and February's written sales are higher by 25%, compared to the same period last year. The company won't be able to count that revenue until delivery though, so the positive bump won't show up until the quarter ending in June.

...And Losers
Every dollar spent on improving an existing home is one less reason for its owner to buy another home (new or existing). And, the numbers cited above suggest this is precisely what's happening - a trend that won't likely stop and turn on a dime.

While this translates into a fairly miserable experience for real estate agents, it's downright devastating for homebuilders.

The Bottom Line
Think about this for a second: There were more new homes sold in October, 2008 - at the pinnacle of the real estate crisis - than there were in February of this year (32 thousand versus 24 thousand), when the economy is clearly firing on at least a few more cylinders. If that trend's not bad news for Homebuilders SPDR (NYSE:XHB), the Dow Jones U.S. Home Construction Index Fund (NYSE:ITB), and all their constituents, then I don't know what is.

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