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How To Make Money On The Housing Recovery

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How To Make Money On The Housing Recovery

The Wealth EffectThe easy money has already been made on the housing recovery; however, that does not mean that there are not plentiful ways to still make money on the housing recovery, an investor just needs to understand how to make money on the housing recovery as it matures into a new stage.  Just as is the case with most things financial, housing recoveries often follow a predictable pattern.  2009 through the first half of 2013 could be called the initial stage of the housing recovery, in which big gains could be made by buying and holding Real Estate Investment Trust (REIT) stocks and home builder stocks, or just buying deflated properties outright and holding them, as the housing market recovered from a steep slump.  As REIT stocks and homebuilder stocks reached a peak during the late spring of 2013, the housing recovery entered its second stage, which is a point at which investors need to change their investment focus in the housing sector.

The second stage of a housing recovery is a good time to buy companies connected to the home renovation industry, as many homeowners renovate their homes as housing prices recover.  This is due to homeowners feeling the “wealth effect” of having more equity in their homes and the fact that with home prices rising, many homeowners renovate their homes, so they can move.

While the first stage of a housing recovery offers explosive profit opportunities, the second stage offers more modest profit opportunities that can be quite profitable for traders and investors willing to hold investments for the medium term, until the next economic recession puts pressure on the housing industry and reduces spending on home renovations.  Companies that make their money from home remodeling and renovations typically outperform as a housing recovery matures, including building materials suppliers and raw materials producers.  With the housing recovery reaching the mature second stage, investing in stocks associated with the home renovation industry is the most sensible way to try to profit from the ongoing housing recovery.

Be Careful Where Investments Are Made During The Second Stage of The Housing Recovery

It is a mistake to assume that stocks associated with homebuilders and property management companies, such as Real Estate Investment Trusts (REITs), will do well during the second stage of a housing recovery.  While they may have a few good years left in them, as the housing recovery matures, the stock market has likely already priced in their gains.  These stocks rallied hard off of the 2009 lows and reached unsustainable levels by the spring of 2013, and sold off.  The risk of holding these first stage stocks is high since they have already made significant moves and may have their earnings impacted by future interest rates hikes, as the economy gains strength.  Instead, investors should look at publicly traded companies that make a large portion of their money from the home renovation industry when the housing recovery has matured and entered the second stage.

Investments For The Second Stage of The Housing Recovery

Make Money On The Housing RecoveryThe reason why companies associated with the home renovation industry do better during the second (mature) stage of a housing recovery is because once a housing recovery matures and house prices have recovered, homeowners feel better about their net worth and are willing to spend money on renovating their homes.  Also, since the prospects for moving have brightened at this point, many homeowners may take on home renovation projects to get their homes ready to sell.  Finally, professional home flippers once again see profits to be made as housing prices increase, which provides another source of revenue and income for companies associated with home renovations.  This includes companies that supply materials to the home renovation industry.

The following are some retailer investment ideas for the second (mature) stage of a housing recovery.

  • Home Depot (NYSE: HD) is the leading hardware and home remodeling store, and is categorized as a home improvement retailer.  Home Depot sells building materials, home improvement products, and lawn and garden products.  The company also provides installation, home maintenance, and professional services.
  • Lowe’s Companies, Inc.  (NYSE: LOW) is a home improvement retailer that is second only to Home Depot in the hardware and home renovation industry.  Since it is smaller than its larger rival, Lowe’s may have more room to grow.
  • Tractor Supply Company (NASDAQ:  TSCO) is a retailer that provides a wide selection of merchandise, including home improvement products that are geared towards homeowners and businesses in rural areas.

For more home improvement retailer investment ideas, see the Dow Jones U.S. Home Improvement Retailers Index (^DJUSHI).

The following are some supplier investment ideas for the second (mature) stage of a housing recovery.

  • Lumber Liquidators Holdings, Inc. (NYSE:  LL) is a specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories that are used heavily by the home renovation industry.
  • Mohawk Industries, Inc. (NYSE:  MK) designs, manufactures, sources, distributes and markets flooring for residential and commercial applications.
  • Louisiana-Pacific Corp. (NYSE:  LPX) is involved in manufacturing and distributing of building products for home construction, repair and remodeling, manufactured housing, and light industrial and commercial construction.

Check The Remodeling Market Index To Get The Pulse of The Remolding Industry

Housing Recovery ChartTo develop and understanding of the state of the remodeling industry and the future potential for stocks associated with home remodeling, it is a good idea to check the National Association of Homebuilder’s Remodeling Market Index (RMI) from time to time.  The Remodeling Market Index is an excellent resource for gauging the pulse of the home remodeling industry and whether home remodeling activities are strengthening or waning, which affects stocks connected to the industry.  By assessing the direction the index is moving, an investor can make informed investment decisions regarding when to buy and sell stocks associated with the home remodeling industry.

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