The housing market is recovering – or at least that’s what the perception is right now. As the Fed watches the numbers, consumers and investors are trying to figure out where they can make a profit from the upswing.
Home prices have risen at a quick pace in the last year. CoreLogic’s Home Price Index Report finds prices from September 2012 to September 2013 have increased by 12%, and the median home price for a single family is $207,300.
With buyer confidence, the housing market is getting back to normal, and many homeowners are heading out to home improvement stores to buy supplies to improve their homes – in particular kitchens and bathrooms.
Since kitchens and bathrooms are the most common rooms in a home, homeowners are able to recoup the money they invest in them. And home improvement stores such as Home Depot and Lowe’s have benefited from this increase in interest in home renovations.
Recently, Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) revealed their third quarter earnings, and they were both up from the previous quarter. Home Depot had a whopping 43% increase in net income, while net income at Lowe’s grew 26%.
It’s obvious these stores are benefiting from the housing market boom. But how long will it last?
The Fed and the Housing Recovery
Right now, the housing market is on shaky ground. Yes, it’s improving, but it slows at times too – especially when the Fed starts talking taper.
As soon as the Fed even mentions a taper of the bond buying program, stocks tumble and mortgage rates tick up. The biggest occurrence of this was when the Fed first said it may taper in May 2013. It lasted through the Fed’s meeting in September.
The 30-year-fixed rate mortgage jumped .22 percentage points on May 30, 2013, reported CNNMoney, a 15% jump from November 2012. The mortgage rate kept increasing too, as the Fed went back and forth each month about whether it wanted to taper.
During the same time, there was a huge sell-off in the stock market. CNNMoney reported the Dow Jones Industrial average sunk 209 points, or 1.3%. The S&P 500 decreased 1.4%, and the Nasdaq dipped 1%.
Since that time, the Fed hasn’t tapered. In September, Bernanke announced the Fed would not pull back from the stimulus until the economy could sustain itself. At this time, the Fed doesn’t believe it can handle a taper.
Almost immediately, the stock market rallied. The S&P 500 jumped to a record high, the Dow did the same, and so did the Nasdaq. They all closed that day (September 18, 2013) up as much as 1%.
Mortgage rates dipped too. Freddie Mac reported a decrease to 4.5% from 4.57%.
Since that time, mortgage rates have been decreasing, and they now sit at around 4.25%. Of course, housing stocks have also been faring well with the easing of Fed talks about tapering.
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Continuing the Housing Rally
Why does the Fed have so much of a hold on the housing market? Well, if the Fed tapers, mortgage rates will rise. As soon as mortgage rates go up, homebuyers stop buying. Homeowners also stop renovating.
Homeowners are improving their homes because they want to capitalize on the higher home prices. Other investors are buying houses for the sole purpose of fixing them up and selling them. But if there aren’t homebuyers out there, there’s no reason to get these houses ready to sell.
Right now, however, the housing market is booming. The Fed has given the green light to fuel the stimulus, and people are benefiting from the low mortgage rates and higher home prices. This is boosting home stocks, as we see with Home Depot and Lowe’s.
But there’s not much time left. This boom may not survive the taper. That’s why investors better get into the market now. As soon as the holidays are finished, people are going to head out to do what they need in order to get ready to sell or buy. This is when you could profit from investments in Home Depot, Lowe’s, or even appliance companies such as Whirlpool (NYSE: WHR), since people often upgrade their appliances in home renovations.
Don’t focus too much on homebuilders though. They aren’t seeing the boom as much the home improvement stocks are right now. It’s likely consumers are still too anxious to make the step into construction. When people build, they have to wait to lock in a mortgage rate, and with rates going up and down, it’s still an uneasy time.
The best investments in the housing market right now are in home improvements. They are seeing the most growth, and will continue to see it into 2014 and likely into the spring season.
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