Here’s why Home Depot and Lowe’s are booming in a housing market meltdown

As the U.S. housing market falls hard from its pandemic-induced highs, home improvement retailers like Home deposit and Lowe’s doesn’t seem to feel the same pain. In fact, they’re doing better than expected.

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

Home Depot and Lowe’s reported strong quarterly results Tuesday and Wednesday, respectively. Lowe’s stock jumped about 5% on Wednesday. Executives from both companies spoke optimistically about the prospects for their business in 2023. This comes as home sales, prices and construction all weaken significantly due to a massive increase in mortgage rates.

Home Depot CFO Richard McPhail pointed to a ‘spot-improvement’ mentality among current owners, who may have wanted to sell but changed their minds because they could no longer command 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. With mortgage rates rising, homeowners are staying put.”

Home prices are still 11.4% higher in October than they were in October 2021, according to CoreLogic, but this annual comparison has been declining for several months. Prices are falling month-to-month at a much faster rate than normal seasonal trends.

Yet the unprecedented spike in house prices during the early years of the pandemic, fueled by record high mortgage rates and the desire of many Americans to move to larger homes in suburban areas, gave homeowners equity considerable. Prices have jumped more than 40% in just two years.

At the end of the first quarter of this year, before the sharp rise in mortgage rates weakened the housing market, homeowners collectively had $11 trillion in equity, according to Black Knight. This is the amount a borrower can take out of their home while leaving 20% ​​equity. This equity increased by an unprecedented $1.2 trillion in the first quarter of this year alone. Per owner, it amounts to approximately $207,000 in workable equity.

That equity is part of a three-pronged driver of home improvement, according to Lowe’s CEO Marvin Ellison. He pointed to house price appreciation, the age of the US housing stock – which is around 40 years old, the oldest since World War II – as well as high levels of personal disposable 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 “Squawk Box.” CNBC.

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

The NAHB, however, predicts that the renovation sector will fare the best among the residential construction submarkets during this current housing contraction.

“The rate of improvement spending growth will slow due to lower existing home sales,” said NAHB chief economist Robert Dietz. “However, an aging housing stock, the trend towards working from home and a decline in household mobility are all driving renovation spending.”

Dietz also points to “interest rate lock-in effects,” meaning people don’t want to sell a home where they could pay a 2.75% mortgage interest rate and trade in for another home where the rate would probably be around 7%. today.

Harvard’s Joint Center for Housing predicts annual gains in home improvement and maintenance spending will decline “sharply” by the middle of next year, but only at a growth rate of 6 .5% from an unusually high rate of 16%.

“Housing and renovation markets are undoubtedly slowing from the exceptionally high and unsustainable growth rates that have followed in the wake of the pandemic-induced recession,” says Carlos Martín, Project Director of the Remodeling Futures Program at the Center. “Spending on home renovations will continue to face headwinds from declining home sales, rising interest rates and rising costs for contractor labor and construction materials. construction.”

Despite inflation in just about everything in the economy, consumers seem 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 an increase in their income.

“There’s inflation in the market and elasticity, but not to the degree we expected, and the customer is showing us they’re resilient,” Home Depot’s McPhail said.

A recent survey of nearly 4,000 homeowners by Houzz, a home improvement and design website, found that only 1% of homeowners said they canceled a home improvement project in 2022. Meanwhile, 37 % have completed a project in 2022 and nearly a quarter said they plan to start a home improvement project in the next 12 months.

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