Given the herky-jerky housing market, it’s not surprising that housing-related businesses such as HVAC suppliers, home-improvement retailers and paint makers have dragged.

Known collectively as repair-and-remodel, or R&R for short, these companies have tended to follow the housing cycle — prospering when the market boomed and softening when it retrenched.

Several factors weigh on the industry — some of them spanning several years. To start, housing turnover has sagged to about 4 million annually, down 30 percent from the 2021 peak and comparable to levels during the great financial crisis. That’s been compounded by slack demand for renovation services from existing homeowners. Not surprisingly, investors have been scared off by lackluster earnings and concerns that low home affordability, high mortgage rates and a hawkish Federal Reserve are signaling more trouble to come. 

But there’s more to this story.

For one, I don’t think the housing pullback indicates a lack of demand. Though turnover has been sluggish, prices have climbed. To me, that implies that the sales downturn is less about flimsy demand and more about a limited amount of the right kind of inventory.

Similarly, I don’t think the blasé renovation figures are purely because consumers are overburdened. Rather, extraordinary events had pulled forward demand for remodeling. In 2020 and 2021, the pandemic shutdowns prompted a surge of renovations. Then when mortgage rates and prices rose precipitously, pragmatism won the day and homeowners chose to delay big projects. However, in today’s world, many homeowners who bought or refinanced during the record low mortgage rates of the COVID period are increasingly realizing that their starter home may now be their forever home, which means they will need to invest in maintenance or additions to their home.

Overall, I think markets have been excessively punitive to R&R, especially as sales volumes have been flat amidst what has been the worst period for consumer confidence on record. As a result, many stocks appear inexpensive, priced as though flat volumes would persist in perpetuity. Additionally, R&R has tended to be fairly resilient: if you own a home and plan to continue living in it, you tend to not let it fall apart.

Of course, it’s impossible to know exactly when the cycle will turn, particularly in an environment that’s experienced several unpredictable shocks. A “stagflation” scenario, in which stagnant economic growth is accompanied by persistently high inflation, would likely further erode share values – in many ways, it feels like that’s the market’s chief concern today. Nevertheless, with a lot of these R&R stocks trading at what I consider to be trough valuations and with consensus estimates baking in flat volume growth for several years, I believe the long-term upside outweighs the near term risk.

The housing market isn’t a sign of a bad structural demand — it’s more a lack of consumer confidence and a mismatch in the right inventory.

The age-old logic is that a weak housing market reflects a weary consumer. There’s an element of this in today’s scenario — for example, housing affordability has dropped significantly in recent years, largely as a result of mortgage rates spiking from 3% to near 7% in 2022. That is having an impact on demand. But as I noted earlier, home prices have slowly risen despite lackluster demand, indicating that supply is still a bigger constraint to sales volumes.

But existing homeowners are somewhat insulated from that strife. Take one underlying issue of home affordability: Today’s relatively high interest rates, typically in the 6% to 7% range for a 30-year home loan. Historically speaking, that’s a fairly average rate. But many homeowners purchased during the decade-plus span of ultralow rates. A generation of homebuyers was able to settle into a 3% mortgage — an unusually good deal that came to be viewed as the norm. The differential can easily translate to payments that are $1,000 higher, and that’s giving many existing owners a comfortable financial buffer.

That’s also part of why fewer homes are coming onto the market. A lot of homeowners have chosen the comfort of low monthly mortgage payments over the pleasure of buying new homes. But the relatively low payments also mean that property owners have disposable cash to maintain and upgrade their aging houses. That’s a good scenario for R&R sales. 

Weakness in the renovation market seems temporary.

So if existing homeowners are doing well, why have they not been remodeling and upgrading?

A major contributor was the glut of renovations that came during the pandemic. Remote work became far more common during pandemic lockdowns, and that changed consumer behavior. Many workers relocated to less-expensive areas, with the concomitant repair and remodeling a move entails, while others stayed put and renovated — adding a home office, for example, or just making things a little more comfortable. That frenzy of home-improvement work ate into future demand, and I believe we’re just now starting to move beyond it.

Additionally, the rapid rise in mortgage rates caused lots of uncertainty. People adopted a “wait-and-see” mentality toward anything housing-related. Not only were they unwilling to jump into more-expensive homes on the assumption that rates would come down, they didn’t want to sink money into repairs or upgrades in an older place that they might unload. Now that consumers are getting more used to the idea that mortgage rates might not necessarily come down, they are more willing to make longer-term investments as long as they feel that their jobs are secure.

Higher inflation has played a similar role. Over the last couple of years, inflation has remained higher than expected, largely due to wars, tariffs, the rapid rise of data centers, higher overall living costs and uncertainty about the future. This has kept homeowners from making big changes. While prices haven’t moderated in the years since, the pace of inflation has started to come down and wages have continued to grow.

Altogether, I think repair-and-remodel volumes are near bottom. With the stocks baking in essentially no long-term growth, I think they offer a very attractive risk-reward balance today.