The following is a Soap Box rant in response to the question below from a good friend of mine. I felt compelled to share it with readers...
Question:
"So a lot of chatter here about the housing recovery and this being a good time to buy companies such as whirlpool and sherwin williams. (Basically stuff people put in their house after moving in.)
1. Any reason to believe the housing recovery is not strong like most recent data shows?
2. Do people have enough income? Is fear about the future easing enough for people to buy these high ticket items?"
Answer:
Here's the thing my friend...
I think that if you have money to invest for 10 years then now might end up being a pretty good time to put money into durable goods firms (e.g. Whirlpool and Sherwin), but placing bets on a housing recovery now is pretty risky, given how much upside we've already seen in housing stocks and the secondary effects on durables.
The housing recovery has been 100% funded by the government to date and we're already seeing signs of fear in the eyes of Builders in the form of construction spending numbers, which have shown deterioration in October and November. The new and existing home sales are getting better and one report of home prices in the 10 and 20 largest metro areas in the country shows a bottom in the median price of homes, but again this was all leading up to the original expiration of the first time home buyer tax credit.
Now there are debates going back and forth as to whether the extension will milk any more sales out of the beneficiary demographic targeted the first time around (young renters looking to get into the market). Home purchases are large decisions which take time, a great deal of capital raising, and job security and I don't foresee enough individuals who qualified for the tax rebate in the first housing stimulus package, suddenly feeling more optimistic about their financial situation and/or the economy, and coming to the table for this last ditch effort by congress/Obama to spark a real recovery. We will, however, get some additional sales from current homeowners who now have the chance to buy homes for a tax refund through mid summer 2010 and it might be enough to really get all the pistons firing. Still, I'd keep an eye on the sales and prices over the next few months before making any drastic decisions to call the recent pop a "recovery" in housing.
More importantly, if unemployment truly peaks and we see some job creation in this country, that will be the time for housing to recover. Unfortunately, stocks move way ahead of actual change and operate more on fluctuations of the second derivative of economic data (i.e. when things are getting worse at a lessor rate, stocks bottom) so the rebound in the names you've mentioned are "baked in the cake". This doesn't mean that you won't have a chance to buy the companies for a profit on future successes in their businesses, but there has been a great deal of piling into this market by institutions and big money players who are terrified of being in cash amidst the current currency debacle and the valuations on stocks just aren't pretty enough for me to advocate buying anything listed on the NYSE or Nasdaq.
Most importantly, we must remember that the housing boom of 2005 and 2006 was the best two years in a lifetime for home builders and absolutely cannot be expected to return this time around. Unemployment is far worse than in 2004 and there has been a fundamental shift from the "upgrade" consumer mentality which fueled the overconsumption, on which the latest bull market thrived.
What you must do now is wait for a substantial pullback for the market to give you some better deals and then see if you still have the conviction to invest in a U.S. housing recovery. If you feel this way when the names have pulled back 10-20% then that will be the time to buy. Best of luck my friend and I am honored that you would ask my opinion.
