Are automakers the best way to play housing?
Ford and GM hitch a ride as construction picks up.
The housing market is what pushed America into the depths of the Great Recession a few years back and now it's helping to pull the economy out.
The thought process is actually rather simple to comprehend. Unlike health care or technology, which require white collar, college-educated and (generally) very intellectual people to improve and innovate current products, housing is different.
Let me be clear upfront: I'm not saying tradesmen (and women) are uneducated. They're smart and intellectual people as well, but their skill set is very different and that's okay. Hell, my father's a carpenter. Some of the quickest minds I know belong to people in housing or trades.
But while there might be a half-dozen scientists cooking up a way to create a more efficient assembly line -- many times, effectively eliminating blue collar jobs -- or a faster microchip, there are 50 tradesmen working on tight deadlines to accomplish their goals.
Looking immediately over the salesmen, corporate workers and executives in housing -- there are plenty more people involved.
First the heavy machinery team gets started on digging up the earth. Then the concrete crew lays the foundation. Carpenters come in to frame the house after that. Then flooring, cabinets, roofing and a slew of other things need to be added before the task is complete.
Many times, each one of these jobs are done by a different person or team. So as you can see through a quick breakdown, strong housing sales positively affect many, many people. Keep in mind, real estate agents, mortgage brokers and lenders also get a piece of the action.
I could go on and on about how it boosts the economy. How about homeowners who didn't walk from their mortgage when it was deeply underwater? As home prices continue to surge back, those homeowners will be hiring a handyman or small businesses to fix, add-on or remodel their current living space. Again, spreading more money through the economy.
That or they will head to Home Depot (HD) or Lowe's (LOW) for some do-it-yourself projects. With the stocks up 273% and 131% in the last five years and each up more than 50% in the last year, respectively, I think we can easily tell that the move is on.
Guess what that does though? If you assumed that these companies would have to hire more because of this shift, you're right!
While we have millions of contractors headed back to work, there's one area that has been especially resurgent because of the housing recovery.
Car sales have been raging in 2013, continuously beating estimates month after month. It's like Apple (AAPL) in the heydays of its iPhone bonanza. No matter how bullish, analysts just couldn't go high enough on Apple's revenue. Thus, a top-line smash four times a year followed suit.
With household incomes increasing dramatically for these families, new cars are in order. But even more so are trucks for the contractors. Most notably, Ford (F) has seen its F-Series truck sales rise dramatically. Up 24.1% in May and 30% in June from 2012, Ford has proved over the past two months that this recovery is for real.
General Motors (GM) is also seeing a boost, despite getting new trucks on the lot a bit later than other automakers. Vice President of Fleet and Commercial Sales at General Ed Peeper summed (cnbc.com) it up best when he said, "We're seeing service businesses, landscape companies and contractors. These are the folks coming in right now to buy one to four new trucks."
And the best part is, the auto industry is a lot like housing in terms of the "trickle down" effect. Just as contractors, builders and mortgage brokers benefit from increased sales, so do car salesmen and dealerships, assembly line workers and parts manufacturers.
The burden of the collapsed housing and auto markets had all but crippled the economy. Being from Michigan, the effects on the state and in particular, the Greater Detroit Area, were -- and remain -- both enormous and apparent.
But as auto plants add more shifts and as more parts are ordered from manufacturers, the more the economy will start to grow. Money has already started to flow from housing into the autos. Soon, the effects should be felt in retail and consumer discretionary. This will be how we climb out of this hole.
The Federal Reserve is in a tough spot, because it's obvious that they need to taper, but the effects might make all the hard work we've done to climb out of this hole worthless. If mortgage rates continue to climb, demand will go down. I don't think anyone's arguing that.
But as housing goes, the contractors go. As they go, the auto sales go and soon the whole thing will unwind. But the opposite is also true should housing demand remain high.
While we absolutely need the innovative, white collar workers of America, we just as badly -- if not more -- need the hands-in-the-dirt blue collar workers if the economy is ever going to roar its way back.
At the time of publication the author long AAPL and F.
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