Business

Home Depot and Lowe show strong demand, but prices could drop


A customer walks into a Home Depot store on August 16, 2022 in San Rafael, California.

Justin Sullivan | beautiful pictures

Spending on home improvement doesn’t seem to hit it big with US housing market slows downbut analysts say the strength may not last.

Home Depot and Lowe’s This week cited strong second-quarter sales from professionals like contractors, plumbers and electricians. Retailers say these customers have a healthy project backlog and pent-up need for home improvement.

Companies are continuing to exert strength from the height of the pandemic on housing market conditions because, they say, people staying in their homes longer could spur renovations. Since the start of this year, the average interest rate on a 30-year fixed mortgage has nearly doubled and home prices have begun to fall dramatically. This month, The National Association of Home Builders / Wells Fargo Housing Market Index dropped to negative for for the first time since the beginning of the pandemic.

“Typically, what’s bad for homebuilders isn’t necessarily bad for home improvement,” Lowe’s CEO Marvin Ellison told CNBC..

Ellison says low housing start times and high mortgage rates can encourage homeowners to stay where they are and choose to renovate their existing homes. He notes that more than half of homes in the US are over 40 years old.

Home Depot’s chief financial officer, Richard McPhail, also notes that the rise in home prices is “probably the strongest underpinning” of home improvement demand.

“We’ve seen home prices increase by almost 40% over the past two years, which has really changed the balance sheets of North American homeowners,” McPhail told CNBC. “When you see your home increase in value, you’re more likely to invest more in it.”

Appreciating home prices can also allow for larger home equity loans, which homeowners use to finance renovations. KeyBanc analyst Bradley B. Thomas notes that Home Depot considers home prices “one of the most important leading indicators of home improvement demand.” The median price for a home sold in July was $403,800, nearly 11% higher than the same month a year earlier.

But with interest rates now higher, home loans are falling after hitting their highest levels since 2007 in the first quarter of the year, said Piper Sandler analyst Peter Keith.

“There’s a bit of a lagging effect,” Keith told CNBC. “We think this drop in home equity deductions will eventually show up in professional spending.”

Keith said the drop could affect contractors and other home improvement professionals later this year or early next year.

Bobby Griffin, an analyst from Raymond James, sees risks to home equity mining, but similarly, he’s largely focused on home prices.

“As rates go up, it’s no longer attractive to take money out of the house,” Griffin told CNBC. “But you still have that equity, so it’s still attractive to invest.”



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