It is easy to get confused and frustrated trying to figure out the housing and homebuilding market these days. A company like Toll Brothers (NYSE:TOL) can seem to be doing a little better, only to see news a few weeks later about dour housing starts or hear disappointing news from Lender Processing Services (NYSE:LPS) about the state of foreclosures.

TUTORIAL: Economic Indicators To Know

Adding fuel to the fire is Friday's news from Universal Forest Products (Nasdaq:UFPI) that their traditional peak selling season was disappointing and the lumber market is in tough shape. While bad news at UFPI does not guarantee bad news for Pulte (NYSE:PHM), Lowe's (NYSE:LOW), USG (NYSE:USG) or American Woodmark (Nasdaq:AMWD), it does offer up evidence that the long-hoped for recovery is still waiting to bloom.

When a Peak Becomes a Valley
The period from March to May is supposed to be some of the strongest months in the year for Universal Forest Products, a producer of lumber and various building products. Unfortunately, the company announced last Friday that year-to-date sales were down 9.5% through May, retail sales were down 15% and the lumber market declined for 11 straight weeks during what should have been a strong selling period.

As a result of these disappointing numbers, the company is going to implement cost-cutting moves, including layoffs, and may look to sell certain business units. This is a disappointing turn of events, but UFPI does not have an abundance of alternatives. It is unfortunate to send quality workers packing, but UFPI management also has to do what it needs to do to keep the company operating and in position to benefit from that eventual construction rebound.

Knock-On Effects
If Universal Forest is experiencing weak sales, it seems reasonable to expect that lumber sales will be challenging at Home Depot (NYSE:HD), as Home Depot is one of UFPI's largest customers. Perhaps this is share loss, and maybe companies like Lowe's or Builders FirstSource (Nasdaq:BLDR) will show better results. Don't bet on that, though, as companies like Louisiana-Pacific (NYSE:LPX) have largely echoed the idea that conditions are quite tough out there.

If lumber demand is weak, it is hard to imagine that building activity is going to be picking up soon. Granted, UFPI targets more of the do-it-yourself market, and that is arguably more weighted towards small projects and repair/maintenance, but it is hard to see how companies like USG, Simpson Manufacturing (NYSE:SSD) or Owens Corning (NYSE:OC) are going to thrive with little building activity and a huge inventory of homes waiting to sell.

Going a step further, even if the dismal market is weighted towards small projects, that is hardly good news for the American Woodmark's, Fortune Brands (NYSE:FO) or Mohawk's (NYSE:MHK) of the world. Simply put, there is little evidence that people are comfortable (or financially capable of) putting money into their houses.

The Bottom Line
Eventually the housing market will recover. It is certainly possible that there will be more multi-generational households than before and that changes to lending laws will keep potential buyers out of the market. Nevertheless, demographics dictate that there will be building, renovation, and repair eventually.

The question is how to play an "eventual" development. It seems unwise to hold a company like UFPI, USG or Headwaters (NYSE:HW) in the expectation of a recovery that just does not seem to be happening yet. In contrast, holding bona fide timber companies like Plum Creek (NYSE:PCL) or Weyerhaeuser (NYSE:WY) may be the better play. While these companies are certainly not risk free, and a bad timber market constrains their dividend growth and valuation, they own their own trees and that inventory will still be there whenever the residential market recovers. (For more, see 5 Factors To Watch In A Housing Recovery.)

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Tickers in this Article: UFPI, LOW, USG, AMWD, HD, BLDR, LPX

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