Home Renovation Market Healthy

All eyes are waiting for the July housing market numbers. And if everything plays out, I expect to see more evidence of softness in housing starts and building permits.

 The monthly housing starts have been below estimates in three of the last four quarters and in June fell to its lowest level since March 2005. Housing starts have not been above two billion since February. The picture for building permits looks even worst. The monthly building permits have been below estimates for the last four straight quarters and have declined for five straight quarters since January. The June reading was the lowest since September 2003.

 What makes me believe the downward trend will continue is the rising rates, which has clearly impacted borrowing and the housing market.

 Toll Brothers Inc. (NYSE/TOL), a builder of luxury homes, gave us some more evidence of a slowdown. The company’s third quarter sales declined to $1.53 billion, down marginally from $1.54 billion the prior year. And to make mattes worse, Toll lowered its fourth quarter delivery estimate.

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 The third quarter was quite soft with the number of signed contracts plummeting to 1,473 units compared to 2,857 units for the 2005Q3. The company’s backlog fell to 8,044 units from 9,727 units on a year-over-year basis.

 Looking ahead to the fourth quarter, Toll said it would deliver about 2,500 to 2,800 homes, down from the previous estimate of 2,900 to 3,000.

 My view continues to be somewhat negative towards the building sector and the recent data helps to support this. The July data should also be soft.

 An area that I continue to like is the home renovation market where the trend is expected to remain healthy going forward as homeowners renovate existing property. I continue to like Home Depot Inc. (NYSE/HD) and Lowe’s Companies Inc. (NYSE/LOW) as far as renovation stocks. Both stocks are near 52-week lows and the valuation has become more attractive.