A BMB reader writes and asks for our take on the housing industry and how stocks like Home Depot and Lowes might be affected by changes in the housing group. First, we’ll take a look at the housing stocks:
One of the best ways to keep an eye on the housing sector is to watch the Philadelphia Housing Index, or HGX, a group of 21 stocks representing home building companies, building materials suppliers and home mortage insurers. Let’s see how the HGX has been performing:
 |
The HGX’s attempts to move much above the 400 level have been thwarted a few times already this year, most recently in early October. An area of congestion exists between the 350 and 370 marks, with the lowest support levels at around 344. |
 |
A longer term look (2 years) at the HGX shows the chart to be flattening since late 2003, and the resulting range from near 350 to just above 400. Is this consolidation - for a move higher - or is the index topping here? A break above the 410 level would imply further upside, while a break much below 350 might spell trouble for the industry. |
|
A significant development in the housing industry came back on October 4th, when Pulte Homes (PHM) warned of its troubles in the Las Vegas market, where the company apparently believes it tried to raise prices too much. The stock and the sector took a big hit at that time. Of course, the sector is also likely to cool off considerably should longer-term interest rates, thus mortgage rates, ever start to rise significantly from their current low levels.
How can you play the housing sector? Aside from buying the individual names, it is a little difficult to invest in a broad range of housing stocks — BMB knows of no ETFs that track the homebuilding indices. But you don’t have to restrict yourself to the homebuilders — mortgage lenders like Countrywide Financial (CFC) have also benefitted greatly from the boom in housing and refinancing.
However, there are a number of ETFs that track various REIT (Real Estate Investment Trust) indices — ICF, IYR and RWR are just a few. REITs typically pay a healthy dividend, but are involved in various other aspects of real estate management and development, such as business real estate, retail properties, healthcare facilities, etc.
Now on to the second part of the question — did the home improvement retailers like Home Depot and Lowes ride the coattails of the housing market? A first glance at the charts of HD and LOW might lead you believe that they did. But did they really do as well as the housing index, or were they just enjoying the boost from a rising market early in 2003? For that answer, we need to look at a chart of those stocks relative to the housing index:
 |
This chart shows the relative performance of Home Depot vs. the HGX index over a 2-year period. Where the chart is rising, HD outperformed the HGX — where the chart is falling, HD underperformed. Here we see that HD actually underperformed the HGX over much of the past 2 years. Only recently has its performance improved in comparison to the HGX, much of that due to the Florida hurricanes. |
 |
LOW also underperformed the HGX over same 2 year period. |
|
Charts courtesy of StockCharts.com
