Home Depot and Lowe’s are booming in a real estate crisis

A construction company works on a house in Cambridge, Massachusetts.

Susanne Kreuzer | The Boston Globe | Getty Images

As the U.S. housing market falls sharply from its pandemic-related highs, home improvement retailers are doing well home depot and lowes don’t seem to have the same pain. In fact, they are doing better than expected.

While home construction and home remodeling are integrally linked, the market forces behind them can differ, and that is what is happening now.

Home Depot and Lowe’s reported strong quarterly earnings Tuesday and Wednesday, respectively. Lowe’s stock rose about 5% on Wednesday. Executives at both companies spoke optimistically about the prospects for their businesses in 2023. This comes as home sales, prices and construction slow down significantly due to a massive hike in mortgage rates.

Home Depot CFO Richard McPhail pointed to an “improve-in-place” mentality among current homeowners who may have wanted to sell but have changed their minds because they couldn’t afford the top dollar.

“At this point, we can only repeat what our customers tell us,” said McPhail. “There’s a dynamic that we don’t see a lot in the market. With mortgage rates rising, homeowners are staying put.”

With mortgage rates rising, homeowners are staying put.

Richard McPhail

Chief Financial Officer of Home Depot

According to CoreLogic, October home prices are still 11.4% higher than October 2021, but that year-to-year comparison has been down for several months. Prices fall month to month much faster than normal seasonal trends.

Still, the unprecedented surge in home prices in the early years of the pandemic, fueled by record-low mortgage rates and many Americans’ desire to move to larger suburban homes, provided homeowners with significant amounts of equity. Prices have increased by more than 40% in just two years.

By the end of the first quarter of this year, before soaring mortgage rates stalled the housing market, homeowners had a total of $11 trillion in so-called vulnerable equity, according to Black Knight. That’s the amount a borrower can take out of their home while still keeping 20% ​​equity in it. That equity grew by an unprecedented $1.2 trillion in the first quarter of this year alone. That works out to about $207,000 in vulnerable equity per homeowner.

According to Lowe’s CEO Marvin Ellison, that equity is part of a three-pronged drive for home improvement. He cited the rise in home prices, the age of the US housing stock – which is around 40 years old, the oldest since World War II – and the high level of disposable personal income.

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

Build vs Rebuild

Home builders, some of whom are involved in both home construction and home renovation, are not feeling quite as optimistic about their market. Builder sentiment plummeted in November for the eleventh straight month, hitting its lowest level in a decade, according to the National Association of Home Builders.

However, the NAHB forecasts that the remodeling sector will perform best among the residential construction submarkets during this current housing contraction.

“The growth rate for improvement spending will slow due to declines in existing home sales,” said Robert Dietz, NAHB’s chief economist. “However, an aging housing stock, home-working trends and a decline in household mobility are all supporting remodeling spending.”

Dietz also points to the “fixed interest rate effects,” meaning that people don’t want to sell a home that they might be paying a 2.75% mortgage rate on and swap for another home where the interest rate is likely to be around $7 % would lie. today.

Harvard’s Joint Center for Housing forecasts that annual growth in home improvement and maintenance spending will slow “sharp” by the middle of next year, but only to a 6.5% growth rate from an unusually high rate of 16%.

Builder sentiment falls for 11 straight months

“The housing and remodeling markets are undoubtedly slowing down due to the exceptionally high and unsustainable growth rates that followed the recession caused by the pandemic,” says 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.”

Despite inflation in almost every area of ​​the economy, consumers appear to want to spend more on their homes. Both Lowe’s and Home Depot saw a decline in the number of sales but a jump in the dollar amount of those sales. This led to their sales increases.

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

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

“Additionally, more than half of the homeowners we surveyed have no intention of selling or moving out of their current homes in the next 20 years or ever,” said Marine Sargsyan, business economist at Houzz.

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