Building product suppliers are experiencing an outsized benefit from the slow but steady housing market recovery. While homebuilder demand is more correlated to new starts and new home sales, building product suppliers get a boost in demand from new home sales as well as existing home sales. As shown in Exhibit 1, new and existing home sales continue to recover from their respective lows in 2010 and 2011, with new home sales recently accelerating to a new high in July of 654,000 units, which represents an increase of 31% year over year.
Exhibit 1: New home (top) and existing home sales (bottom) recovering from lows in 2010-2011
Another important indicator to building suppliers is existing home prices (Exhibit 2), which also hit new highs recently. While this has stifled turnover to an extent, it has been a tailwind for home repair and remodel activity. As home values appreciate, it bolsters homeowners’ confidence and encourages banks to increase home equity lending, allowing consumers to undertake repair or remodeling projects. These projects include, but are not limited to, new cabinets, plumbing, windows, doors and locks, wallboard, HVAC, water heaters, flooring, and roofing. In 2016, we have benefitted from owning companies whose sales are over-indexed to repair and remodel activity instead of new construction. We continue to hold these micro and small cap names and remain positive about their outlook for the remainder of the year.
Exhibit 2: Existing home prices have also hit new highs recently
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