One of the central themes of the US economy recently has been soaring home values. Based on data from Red tuna, a real estate brokerage firm, the median selling price of homes sold in October jumped 13.2% from a year ago. October was actually the 15th consecutive month of double-digit gains.
For investors looking to play this trend in 2022, two huge retailers come to mind. here’s why Home deposit (NYSE: HD) and Lowe’s (NYSE: LOW) are actions to consider if you want take advantage of rising house prices.
Why are house prices rising?
A little background on the current real estate situation can provide readers with some context. I think there are three main reasons for soaring house prices.
First, the pandemic is causing many people to reconsider their living conditions. Called the “big overhaul” by Zillow, Americans, now armed with greater flexibility thanks to the popularity of remote work, envision cities at lower cost as places to live. Why pay astronomical living expenses in places like New York or San Francisco when many companies let their employees work from anywhere? A larger house with a home office can be purchased more affordably in less dense metropolitan areas.
Second, interest rates are still at historically low levels. The Federal Reserve has injected unprecedented amounts of stimulus into the economy to support individuals and businesses during this difficult time, adding downward pressure on rates. Although the last Fed meeting revealed plans to tighten monetary policy and hike rates three times next year, the average 30-year fixed-rate mortgages in the United States have fallen steadily over the course of the year. over the past 40 years and still stands at record levels.
Finally, there is simply a housing shortage right now. Even before the pandemic, the pace of house building since the Great Recession was not adequate. As a result, the United States is estimated to be short of 5 million single family homes. This is a problem that will likely persist for many years. It is no wonder that prices are rising so much.
Benefits of Home Depot and Lowe’s
During the Gold Rush of the late 1840s, it was not a miner who became the first millionaire. Instead, Samuel Brannan, who sold shovels, pickaxes and stoves, was known as the richest man in California at the time. Firms that sell goods and services that meet the actual end product are known in the investment world as “pickaxes and shovels.” With higher house prices, people are increasingly looking at home improvement projects as investments in their properties – and Home Depot and Lowe’s are that pick-and-shovel opportunity right now.
The United States will still be grappling with the three industry tailwinds – Americans moving, low borrowing costs, and limited housing supply – in 2022, setting these home improvement giants ready for continued success. . Wall Street analysts forecast fiscal 2022 sales of $ 154 billion and $ 97 billion for Home Depot and Lowe’s, respectively. While this is only slightly up from the current fiscal year, keep in mind that comparisons next year become difficult as these two companies have seen increased demand since the start of the pandemic.
What makes these two companies special is that they serve both DIY and professional customers. The former saw strong growth at the start of the pandemic, but the latter – which includes contractors, plumbers and electricians – have had their moment to shine in recent quarters as homeowners feel comfortable allowing foreigners to come into their homes for more important projects.
Home Depot generates 45% of its turnover with professionals, a serious advantage over Lowe’s 25%. Plus, Home Depot’s 44% ROI crushes Lowe’s 30% ROI thanks to increased business from these spendthrift and loyal customers.
Based on their price / benefit (P / E) ratios, both stocks negotiate at reasonable valuations today – 27 for Home Depot and 22 for Lowe’s. It is below the widest S&P 500P / E ratio of 29. Still, in my opinion, these companies are better quality than the average of the big index companies. This bodes well for these stocks from a valuation perspective.
Home Depot and Lowe’s are two great companies that have done pretty well during the pandemic – and due to some powerful industry trends, I think that momentum will continue into 2022. If you want to play in the solid housing market , these actions are no big deal at the moment.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.