Homeowners Driving Appliance Market More than Home Buyers

Those who watch the news about the housing market in 2018 have heard a lot of lackluster news. Several stock indexes which track the housing sector such as the iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) have both fallen over 30 percent between their first quarter 2018 highs and their valuations as this article went to press. Equities analysts in this sector see unaffordable home prices, the rising costs for home building materials and rising interest rates as three of the most significant factors restricting greater growth in the market. But when we see price as merely the tool that balances supply with demand, and if we think about how limited supplies and strong demand can influence prices, then the picture of the market looks significantly different.

On the supply side, U.S. New Housing Permits during the first three quarters of 2018 averaged 111,000 units monthly, the highest reading since 2007 and more than double the 2009 average. According to Realtor.com, the average U.S. home in September was on the market for 65 days, down 6 percent year-over-year, while prices are up 7 percent during the same time. However, in many non-rural markets the median days on market has been far shorter while median home prices have grown much faster. This data, combined with the well-known fact that manufacturing and construction labor is in incredibly short supply, is one of the greatest reasons that the volume of new homes being constructed is not higher. 

This leaves us with a market in which people can easily sell their home, but struggle to find another. This would indicate that the market is not weak, but rather significantly underserved. This has two major implications for appliances. First, the limited construction of new home builds will tamp demand for appliances going into new homes. On the other hand, these same conditions may entice current homeowners to upgrade their appliances and home furnishings, knowing that they will be in their current home longer than they may have previously anticipated. A strong labor market and increasing wage growth are two significant factors that will help support home improvements. In fact, data indicates that U.S. inflation-adjusted residential fixed investment in home improvements has increased drastically in the last four years ending in 2017, growing over 30 percent.

Financial data from publicly-traded firms in the home furnishings and fixtures market – as opposed to data from the housing construction market – supports this underlying macroeconomic picture. Real revenue growth – calculated using a 12/12 rate of change at 4.7 percent – is slightly greater than the overall national growth rate. Furthermore, since early 2017 the home fixtures and furnishings market has increased capital expenditures growth at over 10 percent on a TTM basis, suggesting that the industry is seeking new ways to use technology to solve its labor shortage and one of its fundamental constraints in increased new-home construction levels. Overall the appliances market must realize that a more sophisticated understanding of the housing market is needed to truly understand the underlying value in the appliance space.