A key question for potential homeowners is the ability to meet mortgage payments. Chris Graja, Senior Securities Analyst, Argus Research, talks to Sara D’Elia about why the improvement in the U.S. jobs market could be good for housing-related stocks and shares his top picks. Argus Research Company reports are available on TD WebBroker.
Now before we get into your report and your stock recommendations Chris, let's take a little bit of a step back. What's the most important thing investors think about before buying a home?
Yeah, I think it's job security and the ability to make your payments, as you said in the introduction. The ability to either find a new job, a better job, or to bounce back from a layoff gives you that confidence to know you can buy a house and you're going to be there for 30 years. If we look at a chart I provided from the Bureau of Labor Statistics, it shows the average duration of unemployment, going back basically to the end of World War II. And one of the things that really sticks out is how severe the last recession was.
When you look at the data, what's changed and how does what you're seeing translate into your outlook on housing stocks?
Yeah, I think the thing that's most notably changed is that we've gone from taking 40 weeks for people who are unemployed to find a new job down to 25 weeks, which is really encouraging. There was a while there where we felt like things were stuck and the stocks weren't moving. So the key I think now is, number one, that people are feeling more confident. They're more willing to go out and buy homes. They're more willing to invest in their homes. And I think one of the other things that's really important is this explains why, number one, why the millennials have been so slow in coming into the job market or coming into the housing market. And it also explains why this market, after about six years, hasn't overheated already. There's still a lot of pent up demand.
When you look back at the chart, 25 weeks is still above the peak of most of the previous cycles. So I think we have a long way to go in terms of people feeling better about job security and feeling more comfortable buying homes.
Two of the stocks you highlight in your report are Home Depot and Lowe's. And both are up almost 200% in the last five years. Do you still have buy recommendations on those names? And what are some of the risks that could derail a continued run up in the stock price?
Sure. Yeah, I like both of the stocks. I think they still have room to run. Depot's a much more productive business than it was going into the recession. Their customer service is a lot better. And they're using their capital a lot more effectively. I think Lowe's has transitioned from a business that is opening stores to a business that is running more productive stores. So the outlook for the economy is good. The outlook for consumers to continue to spend is good. And yeah, I remain very optimistic on those two stocks.
A couple of the other names I like in our housing-related coverage, DR Horton, the biggest US home builder, Lennar, actually the second biggest US home builder, but with a nice focus right now on first time buyers, so maybe being able to capture some of those millennials coming into the market, and then Toll Brothers, which is a luxury builder, which I think has a nice niche in the market. And one other name we like is Masco, which is a supplier to the sector. And they provide Behr paint and faucets to Depot and Lowe's.
In terms of the risks, one of the very obvious ones is interest rates. We're not so concerned about interest rates moving higher because the economy is getting stronger. But a spike in interest rates that took them, say, above 6%, that could probably derail the recovery. Extreme softness in the economy is something that got people to question job security or created a big uptick in the unemployment rate. That would worry us as well. We're also keeping our eye on the housing market to make sure that we don't get too overheated.
Right now if you look at where housing is as a percentage of GDP, it's got a long way to go, not even to peak levels but to average levels. So people's investment is below norm. But if we see a big pick up, we can start asking if the market's getting overheated.
And then I think the final thing is simply execution. You have to keep your eyes on the companies one by one to make sure they're executing their business plan and that they're doing what they need to do.
Thank you very much.