Up On the Roof

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The typical American continues to confound the skeptics by consuming more than conventional models would predict. One key reason: sky-high levels of consumer confidence. So it's no surprise that a record number of Americans are sinking substantial sums into their homes, which already represent their largest single investment. Over the past several years, spending on home improvements has surged to record levels.

Given the long lead time necessary to plan and execute a major home improvement, this type of spending differs substantially from other discretionary outlays in one crucial respect: spontaneity. That's why the general trend of home improvement spending can be a useful gauge of consumer confidence over the long haul. The accompanying chart displays the close relationship between the two (as reported by The Conference Board).

In each of the past two years, Americans have spent $120 billion improving and repairing their homes, according to the U.S. Census Bureau. Major improvements claim about two-thirds of this total, with the remainder going to routine maintenance needs. The National Association of Home Builders (NAHB) projects that residential remodeling expenditures will grow 3 to 5 percent annually over the next five years.

But the recent boom in home renovation is not solely the result of surging confidence. The aging process (of the houses, that is) plays an important role. While every year some homes suffer the indignity of the wrecker's ball, and new ones are sprouting up in many areas, still, the median age of U.S. homes has been climbing steadily over the past several decades. Currently, according to the NAHB, half of U.S. houses are more than 30 years old, up from 23 years in 1985.

Many homeowners are discovering that systems requiring substantial outlays-such as those for roofs, windows, and heating/cooling-last only 25 to 30 years. So perhaps some of today's renovation spending is not wholly discretionary. But faced with the prospect of a major repair, many homeowners are upgrading as well. Changing lifestyles, improvements in the quality of building materials, and an increase in the square footage of new homes are all partly responsible for stimulating demand for remodeling.

Unfortunately, fresh data regarding construction trends is not available from government sources. Luckily, public companies doing business in these areas provide sales and profit figures for their investors on a more timely basis, and their stocks reflect changing expectations.

The three SentiMeter component stocks chosen for their exposure to home improvement spending-Ethan Allen, Masco, and Maytag-all enjoyed a banner year in 1998 and appear headed for even higher ground in 1999.

Recent news from Maytag regarding sales trends of their most profitable products, such as the new Neptune laundry line, has been upbeat. Meanwhile, Masco is benefiting from a decision to sell more product through "do-it-yourself" retailers such as Lowe's and Home Depot, who are, in turn, reflecting substantial sales growth. Likewise, Ethan Allen is continuing to benefit from steady growth in demand, expanding its store base and manufacturing capacity.

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