The headwinds dragging down the US housing market are positive for home improvement retailers like Home Depot (HD) and Lowe’s (LOW), but it’s unclear how long this momentum will last.
Atlanta-based Home Depot had a better-than-expected quarter amid rising interest rates and economic uncertainty. US same-store sales rose 4.5% year over year for the quarter. Similarly, North Carolina-based Lowe’s reported higher sales and raised its full-year earnings guidance, another sign that consumers are spending money on remodeling.
Executives at both companies expressed an upbeat tone on their prospects for next year as home sales, house prices and construction activity slowed as mortgage rates are now above 7%.
“We’re seeing another interesting dynamic where, as mortgage rates rise, our customers are becoming more likely to stay put and start a project,” Home Depot CFO Richard McPhail said on the company’s conference call.
Nationally, US pre-owned home sales fell for the ninth straight month in October, the National Association of Realtors said on Friday, as rapidly rising mortgage rates scare off many potential buyers. Prices are more than twice as high as at the beginning of the year.
The sharp drop in demand has discouraged sellers.
An employee works in the lumber department of a Home Depot store in Alhambra, California on May 4, 2022. (Photo by Frederic J. BROWN/AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)
For example, the number of homes for sale at the end of October was 1.22 million, down 0.8%. both from September and from a year ago. New listings are down compared to a year ago, indicating sellers are reluctant to list their homes.
At the same time, although price growth has slowed significantly, prices are still high. Nationwide, home prices rose 11.4% year over year, according to Corelogic data.
This has provided homeowners with a convenient nest egg. Homeowners are sitting on an estimated $20 trillion in home equity to invest in home improvement projects.
Federal Reserve data shows that home equity line of credit (HELOC) balances rose $3 billion, the second straight quarterly increase after years of declining balances.
The story goes on
“This unique combination of factors causes homeowners to stock up locally and invest in repairs and renovations to adapt their current homes to the evolving needs of their families, rather than buying a new home,” Marvin Ellison, Chairman, CEO and President von Lowe said on the company’s earnings call.
However, some Wall Street analysts and other industry watchers argue that the home improvement business could feel the effects of the housing market slowdown.
“Any potential drop in home prices could hurt consumers’ perceived return on their homes after several years of record spending[ing] in the category, according to Raymond James analyst Bobby Griffin in a note following Home Depot’s earnings.
Housing issues continue to raise concerns about demand for remodeling, particularly improvements that occur just before and after home sales. Sellers often spend on repairs and updates to attract buyers, while new homeowners spend on projects to make their homes their own.
According to Harvard University’s Joint Center for Housing Studies’ Remodeling Futures Program, annual home improvements and maintenance spending are expected to decline sharply through the middle of next year.
“The housing and remodeling markets are undoubtedly slowing down due to the exceptionally high and unsustainable growth rates that followed in the wake of the pandemic-induced recession,” said Carlos Martín, project leader of the Remodeling Futures program at the centre. “Home improvement spending will continue to face headwinds from declining home sales, rising interest rates and the rising cost of contractors and building materials.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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