Kate is also a Portfolio Manager of Putnam Research Fund and George Putnam Balanced Fund. Walter is a Portfolio Manager of Putnam Global Equity Fund and Putnam Research Fund.
- In the second quarter of 2020, home ownership increased at its highest rate since the third quarter of 2008.
- While tight inventory drives up home prices, affordability has increased due to low mortgage rates, which are a key driver of home ownership.
- In July, consumers increased spending on home improvement by 20% year-over-year.
- We believe that continued demand for products, services, and supplies bodes well for home improvement retailers.
As the economy continues to be challenged by the COVID-19 pandemic, we are seeing two notable trends in the U.S. housing industry. More people are buying houses, and existing homeowners are spending more to improve theirs. It raises an interesting question: Is this happening despite the pandemic or because of it?
Ownership among younger buyers is at a 12-year high
In the 2020 second quarter, home ownership increased to 67.9%, according to the U.S. Census Bureau. This was the highest rate since the third quarter of 2008. People under age 35 have been active, with home ownership for this group rising to 40.6%, a level not seen since before the global financial crisis. This is quite possibly because of the pandemic, as buyers may be compelled to move from crowded cities and seek homes in suburbs.
The inventory of U.S. homes remains below the long-term average. Homes available for sale as a percentage of housing stock is currently 1%, versus a 20-year average of 1.6%. While tight inventory drives up home prices, affordability has increased due to low mortgage rates, which are a key driver of home ownership.
More time at home drives do-it-yourself spending
In 2020, most of us are spending significantly more time in our homes, which, not surprisingly, has increased interest in home improvement projects. In May and June, retail sales of building materials and garden supplies experienced growth in the high teens versus low single-digit growth in the 2020 first quarter. We believe the solid demand from homeowners for products, services, and supplies bodes well for many stocks in the consumer sector, particularly home improvement retailers and their suppliers.
In July, home improvement spending increased 20% year-over-year, according to Bank of America credit card data. Stocks that we believe could benefit include:
Home Depot (HD) and Lowe’s (LOW). Home Depot in May reported a 7.5% increase in first-quarter U.S. same-store sales, and Lowe’s reported a 12.3% increase. We expect similar strength for both retailers for the second quarter. Both companies have strong management teams, generate solid free cash flow, and strategically allocate their capital, in our view. Also, unlike many retailers, these businesses are somewhat insulated from the “Amazon effect” — the pressure placed on traditional businesses from online competition. We believe they can withstand this threat due to the specialized nature of their products and the services. It tends to be easier to make home improvement purchases in person.
Sherwin-Williams (SHW). This paint manufacturer is another beneficiary of consumer spending on home improvement. Second-quarter sales for the company’s Consumer Brands Group increased 21.8% year-over-year. Many consider this company the “go to” paint supplier for contractors. Sherwin-Williams has put considerable research and development into tailoring its products, retail stores, and ordering systems to help them. We believe the company is also relatively immune from online competition, delivers high returns on capital, and benefits from the dual profit streams of manufacturing its paint and selling it.
Keeping an eye on earnings
Businesses enter the third quarter with great uncertainty around the outlook for economic recovery and COVID-19. As companies report quarterly earnings, analysts across our global equity research team have ongoing discussions with company management teams. They are gaining insights and stress-testing their models of earnings and balance sheets. As always, this kind of fundamental research is the key driver of security selection for our portfolios.
Learn more about Putnam Research Fund, George Putnam Balanced Fund, and Global Equity Fund.
As of 6/30/20:
Home Depot represented 1.95% of Putnam Research Fund assets, 1.22% of George Putnam Balanced Fund assets, and was not held in Putnam Global Equity Fund. Lowe’s represented 1.77% of Putnam Global Equity Fund assets and was not held in Putnam Research Fund or George Putnam Balanced Fund. Sherwin-Williams represented 0.31% of George Putnam Balanced Fund assets and 1.70% of Putnam Global Equity Fund assets. It was not held in Putnam Research Fund.
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