Home Depot and Lowe’s are exploding in a housing market crash

A housework contractor works on a house in Cambridge, Massachusetts.

Suzanne Kreiter | The Boston Globe | Getty Images

As the US housing market falls heavily from its pandemic-driven highs, home improvement retailers like it Home storage And Lowes he doesn’t seem to feel the same pain. In fact, they’re doing better than expected.

While home building and home remodeling are integrally linked, the market forces behind each may be different, and that’s what’s happening now.

The Home Depot and Lowe’s reported strong quarterly gains on Tuesday and Wednesday, respectively. Shares of Lowe’s were up about 5% on Wednesday. Executives at both companies have spoken optimistic about the outlook for their business in 2023. This comes as home sales, prices and construction are weakening significantly due to a massive hike in mortgage rates.

Home Depot finance chief Richard McPhail pointed to an “improvement in place” mentality among current homeowners, who may have wanted to sell but changed their minds because they could no longer command the top dollar.

“All we can do at this point is repeat what our customers tell us,” McPhail said. “There’s a dynamic that we don’t see a lot in the market. As mortgage rates rise, homeowners are staying put.”

As mortgage rates rise, homeowners are staying put.

Richard McPhail

Chief Financial Officer of Home Depot

Home prices are still 11.4 percent higher in October than they were in October 2021, according to CoreLogic, but the year-to-date comparison has been easing for several months. Prices are declining from month to month at a much faster pace than normal seasonal trends.

However, the unprecedented surge in home prices during the early years of the pandemic, fueled by rock-bottom mortgage rates and the desire of many Americans to move to larger homes in suburban areas, gave homeowners a significant amount of capital. own. Prices have increased by more than 40% in just two years.

By the end of the first quarter of this year, before sharp increases in mortgage rates rocked the housing market, homeowners had a total of $11 trillion in so-called “tapping equity,” according to Black Knight. This is the amount a borrower can take out of their home while still leaving 20% ​​equity. That capital grew by an unprecedented $1.2 trillion in the first quarter of this year alone. Per homeowner, that amounts to about $207,000 in exploitable stock.

That equity is part of a three-pronged driver of home improvement, according to Lowe’s CEO Marvin Ellison. He pointed to appreciating home prices, the age of US housing stocks – which are about 40 years old, the oldest since World War II – as well as high levels of disposable personal income.

“So when you look at all of those factors, those things bode well for home improvement, and we feel really good about our current trends,” Ellison said in an interview Wednesday on CNBC’s “Squawk Box.”

Building versus renovating

Homebuilders, some of whom work in both home construction and home renovations, aren’t feeling so optimistic about their market. Builder sentiment fell in November for the 11th consecutive month, hitting its lowest level in a decade, according to the National Association of Home Builders.

The NAHB, however, expects the remodeling industry to fare best among the residential construction submarkets during the current housing contraction.

“The growth rate for improvement spending will slow as existing home sales decline,” said Robert Dietz, chief economist at NAHB. “However, aging housing stocks, work-from-home trends and declining home mobility are driving spending restructuring.”

Dietz also points out the “interest rate locking effects,” meaning people don’t want to sell a home where they could pay a 2.75% mortgage interest rate and swap to another home where the rate would likely be around 7% today.

Harvard’s Joint Center for Housing expects annual gains in home improvement and maintenance spending to decline “sharply” by mid-next year, but at only a 6.5% growth rate from an unusually high rate by 16%.

“The housing and renovation markets are undoubtedly slowing down due to the exceptionally high and unsustainable growth rates that followed the pandemic-induced recession,” says Carlos Martín, director of the Remodeling Futures project at the Centro. “Home improvement spending will continue to face headwinds from declining home sales, rising interest rates, and rising costs of contractor labor and building materials.”

Despite inflation almost everywhere in the economy, consumers seem to want to spend more on their homes. Both Lowe’s and Home Depot showed a decline in the number of sales but an increase in the dollar amount of those sales. This has led to their increased revenue.

“There is inflation in the market and elasticity, but not to the extent that we anticipated, and the customer is showing us that they are resilient,” said Home Depot’s McPhail.

A recent survey of nearly 4,000 homeowners by Houzz, a home design and improvement website, found that just 1 percent of homeowners reported canceling a home improvement project in 2022. In meanwhile, 37% completed a project in 2022 and nearly a quarter said they planned to start a home improvement project in the next 12 months.

“Plus, more than half of the homeowners we surveyed have no plans to sell or move out of their current residences in the next 20 years or ever,” said Marine Sargsyan, staff economist at Houzz.

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