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Will building stores be spared from a retail apocalypse?
Jan 24, 2018
Dennis Scully

Over the past year as the Dow Jones Industrial Average has risen by over 30 percent, the prevailing wisdom on Wall Street has been to buy shares in the FANG stocks (an acronym for Facebook, Amazon, Netflix and Google) and avoid, at all costs, the so-called Retail Apocalypse stocks, like Macy’s, Sears and JCPenney. The assumption has been that any company with lots of brick-and-mortar stores simply wouldn’t be able to compete against online giants Amazon and Wayfair.

While it is true that technology stocks have had a great run and many retailers have indeed had to recalibrate their long-term strategy, it might come as a surprise that two of the nation’s largest retailers—The Home Depot and Lowe’s—have, in fact, had banner years. Despite their many stores, their share prices over the past year have not only outperformed the overall market but have even managed to outpace the returns of Facebook and Google.

Will building stores be spared from a retail apocalypse?Could it be that there is a force even mightier than the dreaded retail apocalypse at work here?

Over the past 12 months, both have seen their share prices rise by more than 50 percent. Could it be that there is a force even mightier than the dreaded retail apocalypse at work here? Yes. It is the persistent recovery of the U.S. housing market, which continues to gain momentum and could portend a good year ahead for the home industry.

Stronger than the return of any of the FANG stocks has been the gain over the past year in the iShares U.S. Home Construction ETF (ITB). Created back in 2006, at what turned out to be the peak of the U.S. housing market, the ITB is an exchange traded fund, or ETF*, that owns an array of stocks related to the home building industry. Its largest holdings include home builders such as D. R. Horton, Lennar, and Toll Brothers. It also owns shares of Home Depot, Lowe’s, Sherwin-Williams, Mohawk Industries, Masco and many others.

After little movement over the last several years, shares of ITB have skyrocketed more than 60 percent in the last 12 months. This powerful move could have far-reaching and positive implications for the entire home sector. The home building industry is one of the most economically sensitive, and it usually moves well in advance of major shifts in the economy.

Home sales have been relatively strong for two years in a row now, and housing supply has been tight, which means that housing prices have been rising. Homes are still the largest asset for most Americans. When people feel that their home’s value has increased, they have an increased confidence in the economy.

Witness the latest NBC/Wall Street Journal poll, which revealed that 69 percent of Americans now feel “satisfied or somewhat satisfied” with economic conditions in the country. It is the highest percentage in nearly 20 years.

This increased level of confidence comes at a time when Americans have rebuilt much of the equity in their homes that they lost during the Great Recession. Black Knight Data & Analytics, a research firm that tracks the mortgage market, estimates that the nation’s 42 million homeowners now have $5.5 trillion dollars’ worth of home equity, which they can borrow against.

Will building stores be spared from a retail apocalypse?[W]hen homeowners borrow against their house, the bulk of that money goes back into the home: They build an addition, hire a designer, make new furniture purchases, etc.

Credit rating agency TransUnion is predicting that 1.6 million homeowners will take advantage of that restored equity and take out a new home equity line of credit in 2018—a 16 percent increase over 2017.

Historically, when homeowners borrow against their house, the bulk of that money goes back into the home: They build an addition, hire a designer, make new furniture purchases, etc. (TD Bank found that 80 percent of borrowers taking out home equity lines of credit say that they would consider using that money to renovate, according to a survey released in December.)

With the American consumer feeling richer and more confident than at any time since the start of the Great Recession, perhaps this will be the year that the recovery will finally feel like one.

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*An exchange traded fund is very similar to a mutual fund, in that it owns a variety of stocks, usually with the intention of replicating the performance of a particular sector or industry. ETFs have become more popular with traders because—unlike mutual funds, which have their prices calculated only once a day—ETF shares trade just like stocks, offering greater liquidity and price transparency.

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