Two indexes that gauge U.S. home-remodeling activity suggest a slower pace ahead. Wall Street seems to disagree.
Future market conditions measured by the National Association of Home Builders’ Remodeling Market Index fell to 55.4 in the three months ended March 31 from a record-high of 59.5 in the fourth quarter, data from the group showed Thursday. Similarly, a leading indicator of remodeling work created by Harvard University projects annual growth in home-improvement spending will slow to 2.9 percent by year end from a projected 6.5 percent in the first quarter.
While these measures suggest sluggishness, investors don’t seem to mind. Following a “relatively weak year” for renovations in 2014, “people are warming up to housing again,” said Mike Wood, an analyst in New York at Macquarie Group Ltd.
“Investor sentiment has clearly improved since the end of last year and we’ve seen that partially in stock-price appreciation,” Wood said. Mohawk Industries Inc., a “top player” in the North American residential remodeling industry and one of Wood’s outperform recommendations, has led the Standard & Poor’s 500 Index by 24 percentage points since Sept. 30.
More broadly, S&P’s Homebuilding Select Industry Index -- made up of 35 housing-related companies including Home Depot Inc., Owens Corning Inc. and several homebuilders -- has outpaced the benchmark index by about 14 percentage points during the same period.
Improving “churn” in existing homes, which had a “blockbuster” month of sales in March, could give investors more confidence about the durability of remodeling activity, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, which manages $66 billion.
Purchases of single-family residences rose 6.1 percent to a 5.19 million seasonally adjusted annual rate last month, the fastest pace of sales growth in four years, based on figures from the National Association of Realtors.
With first-quarter earnings under way, company forecasts provide a crucial “boots-on-the-ground perspective” to augment industry data, Ablin said. That’s because executives have access to anecdotal and tangible data -- including the number of cars in store parking lots and daily revenue counts -- that inform their guidance, he added.
Executives from Sherwin-Williams Co. and RPM International Inc. have described their outlook for remodeling-related expenditures as “optimistic” in recent weeks.
Meanwhile, Atlanta-based Home Depot has “confidence about the opportunities ahead” as drivers of spending point to a “healthy, moderate recovery in the housing market,” Richard McPhail, senior vice president of finance, said at a March 3 conference hosted by Raymond James & Associates.
This backdrop is strengthening amid an increase in Americans’ intentions to undertake such projects, Peter Keith, an analyst with Piper Jaffray & Co. in New York, said in an April 16 report. He upgraded his recommendation on Lowe’s Cos. to overweight from neutral that day partly for this reason.
Piper Jaffray’s semi-annual survey of 404 homeowners found that 58 percent of respondents plan to spend more this year to paint, replace flooring and upgrade kitchens, among other work. “Home-improvement spending appears relatively healthy, but may see an acceleration over the coming 12 months,” Keith said.
Another encouraging sign: The amount spent on remodeling could exceed 2007’s all-time high by year-end, said Kermit Baker, director of the remodeling futures program at Harvard’s Joint Center for Housing Studies in Cambridge, Massachusetts.
“The years of steeper gains are behind us,” as the industry returns to longer-term trends marked by “stable, moderate growth,” Baker said.
Still, NAHB’s index of future conditions fell to a one-year low as all of its components -- calls for bids, amount of work committed in the next three months, backlog of jobs and appointments for proposals -- decreased from the prior quarter.
Severe weather in the first quarter is largely to blame and the industry probably will see a “modest improvement” this year, said David Crowe, the Washington-based group’s chief economist.
Another report released Thursday showed purchases of new U.S. homes slumped more than forecast in March from a seven-year high, a sign progress in that industry will be halting.
Spending on all owner-occupied projects will increase 2.3 percent this year when adjusted for inflation, compared with gains of 0.4 percent in 2014 and 3.1 percent in 2013, according to Crowe. Similarly, Wood forecasts total remodeling-related spending will “tick up” this year, though trail 2013’s growth.
For investors like Ablin, making sense of conflicting data is part of the job. Housing data have been spotty in the past year and while he’s disappointed by the pace of new-home sales, he has reason to be optimistic about remodeling and will look at the related indexes “more closely” to complement information from companies, analysts and economists.
“The environment is brightening for remodeling and home-improvement activity,” Ablin said.