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Housing's 'Traffic Jam' Is Creating a Great Opportunity for Investors

By Mike Barrett, analyst, Extreme Value
Friday, July 15, 2016

"It's really a gridlock, a traffic jam that's playing out in the housing market."
That's what Ralph McLaughlin, chief economist for real estate website Trulia, said about the housing market this spring. It's still true. This "traffic jam" is exerting upward pressure on existing home prices... and encouraging owners to spend more on repairs and remodeling.
That's great news for "pick and shovel" housing stocks. Let me explain...
A former executive from a top public homebuilder recently told me...
There are tons of lots and land available where most customers don't want to be, and almost none available where customers do want to be.

Vacant land suitable for development is the raw material that homebuilders rely on most to conduct their operations. Once they create a subdivision, they build homes on each of the lots, then move on to their next community. Top homebuilders routinely maintain several years' worth of land inventory.
But over the past year or so, it has gotten harder for builders to buy land in top metro markets. Low interest rates and favorable demographic trends are encouraging more and more prospective new homeowners to buy... and forcing builders to add more lots to their existing inventories.
The market for vacant land is no different from any other – when demand outstrips supply, prices rise. And as the prices that homebuilders pay for raw land rise, they compensate by building more-expensive homes. Since 2011, the national average price of a new home has risen more than $100,000 to $358,900.
Because the price of new homes is escalating in top metro markets, the gap between mid-priced and premium homes is also widening in many of these same markets.
When the prices of premium homes soar out of reach, many prospective premium buyers simply opt to stay in their current homes. This is the "traffic jam" McLaughlin was referring to.
With home prices once again on the rise, homeowners are more inclined to spend money on repairs and remodeling (R&R). Because the U.S. housing supply continues to age (roughly 40% of homes were built before 1970), the R&R opportunity could be huge going forward. One study we read estimates that spending on home improvement and repairs could be more than $300 billion by next year.
This is great news for companies with a major presence in the home-remodeling business, like the one we recommended to Extreme Value readers earlier this month. At least one leading home-improvement retailer – Home Depot (HD), a customer of our new recommendation – expects the aging U.S. housing supply to be a source of business for years to come.
In summary, market anomalies – like the current "traffic jam" in housing – often create opportunities for astute investors. But remember, such aberrations never last forever. Scoop them up while you can.
Good investing,
Mike Barrett

Further Reading:

Steve is also bullish on housing. "House prices in Florida have gone up – a lot," he writes. "But there's still PLENTY of room to run, as the rate of homebuilding in Florida isn't even close to where it needs to be." Get the full story here: Why House Prices Will Continue to Soar in Florida.
Historic lows in mortgage rates are another catalyst for the housing industry. "If you haven't done so already, refinance your house," Steve writes. "And if you don't currently own a house, go buy one... Seriously." Read more here.

Market Notes


Today's chart is yet another reminder that "boring" often beats "exciting" in the stock market...
Regular readers know we like simple businesses that sell basic, everyday goods. Despite what many people think, one of the safest ways to build long-term wealth in the market is by investing in companies that sell things like laundry detergent and other items that you probably have in your medicine cabinet or pantry.
One of the best examples in recent years is Colgate-Palmolive (CL). Founded more than 200 years ago, the $67 billion giant employs nearly 40,000 people and sells its products in 223 countries. Its brands include Colgate toothpaste, Palmolive dish soap, and Speed Stick deodorant.
Selling the basics has made Colgate-Palmolive a cash-flow machine. It consistently grows its gross profits and margins... and has increased its dividend for 54 straight years. As you can see, shares are in a long-term uptrend, recently hitting a new all-time high. Investing in dish soap and deodorant might not be "exciting," but it works...

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