Don’t Sink Your Money into the Housing Industry

On the troubled housing front, the news continues to be negative. Applications for building permits fell by three percent, according to the Commerce Department. In addition, the sales of existing homes in January declined to its lowest point in about nine years, with the median price for a home sliding for the fifth consecutive month. As I have commented in previous columns, the reduction in home wealth could cause a “poverty effect” to occur that makes homeowners feel they are less secure. This in effect would negatively impact consumer spending going forward. There is still no evidence of a near-term reversal in the housing market. Some pundits have already said that the housing market is in its own recession.

On Monday, evidence of the slow housing market was demonstrated after the country’s second largest home supplies company Lowe’s Companies, Inc. (NYSE/LOW) reported a significant 33.4% year-over-year decline in its fourth-quarter earnings. The company’s key same-store sales number declined 7.6% in the fourth quarter.

The weakness in Lowe’s was supported by news on Tuesday that larger rival The Home Depot, Inc. (NYSE/HD) reported its first ever year-over-year decline in sales. The company’s fourth quarter saw earnings plummet 27% year-over-year. Sales growth in the fourth quarter was an anemic 1.5% versus the same quarter in 2006. The results were well below what Wall Street was hoping vfor, but for us it was not a surprise given the downward housing market trend that has been in place.

To make matters worse, Home Depot continues to expect struggles going forward into this year. “We see the home improvement market in 2008 as challenging,” commented Frank Blake, chairman & CEO, in a press release.

Another indication of the slowdown is the fact that Home Depot has planned to open only 55 stores in 2008, about half as many stores opened in 2007. The end result could be slower growth given the precarious condition of the housing market.

Our advice is to steer clear of the housing market, including home builders and suppliers at this time, as it is a money pit for capital.