Home improvement contractors work at home in Cambridge, Massachusetts.
Suzanne Kreiter | The Boston Globe | Getty Images
As the U.S. housing market eases from pandemic-driven levels, home improvement retailers are cheering Home Depot and Lowe’s do not feel the same pain. In fact, they are better than expected.
While home building and home remodeling are integrally linked, the market forces behind each can be different, and that’s what’s happening now.
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Home Depot and Lowe’s reported strong quarterly earnings Tuesday and Wednesday, each other. Lowe’s shares jumped about 5% on Wednesday. Executives in both companies spoke bullishly about the prospects for their business in 2023. This comes as home sales, prices and construction are all weakening significantly due to a massive jump in mortgage rates.
Home Depot chief financial officer Richard McPhail points to an “upgrade” mentality among current homeowners, who may want to sell but change their minds because they can no longer command top dollar.
“All we can do at this point is repeat what our customers have told us,” McPhail said. “There is a dynamic we do not see much in the market. With rising mortgage rates, homeowners are staying in place.”
Home prices were still 11.4% higher in October than they were in October 2021, according to CoreLogic, but that annual comparison has been shrinking for several months. Prices are falling month-on-month at a faster rate than the normal seasonal trend.
Still, unprecedented home prices in the early years of the pandemic, fueled by record low mortgage rates and the desire for many Americans to move to larger homes in suburban areas, are giving homeowners plenty of equity. Prices have risen by more than 40% in just two years.
By the end of the first quarter of this year, before the steep runup in mortgage rates caused the housing market to falter, homeowners had a collective $11 trillion dollars in so-called tappable equity, according to Black Knight. That’s the amount the borrower can take out of their home while still leaving 20% equity in it. The equity grew by an unprecedented $1.2 trillion in the first quarter of this year alone. Per homeowner, that amounts to about $207,000 in equity that can be tapped.
That equity is part of a three-pronged driver for home improvement, according to Lowe’s CEO Marvin Ellison. He pointed to the appreciation of house prices, the age of the US housing stock – which is about 40 years old, the oldest since World War II – as well as the high level of personal disposable income.
“So when you look at all those factors, those things are going to be good for home improvement, and we feel really good about the trend right now,” Ellison said. in an interview Wednesday on CNBC’s “Squawk Box.”
Home builders, some of whom work in home construction and home renovation, don’t feel very comfortable with the market. Builder sentiment fell in November for eleven straight months, hitting the lowest level in a decade, according to the National Association of Home Builders.
The NAHB, however, is forecasting that the remodeling sector will be the best rate among residential construction submarkets during this current housing contraction.
“The growth rate for improvement spending will slow due to declines for existing home sales,” said Robert Dietz, NAHB’s chief economist. “However, aging housing stock, work from home trends and declining household mobility all favor remodeling spending.”
Dietz also points to the “interest rate lock-in effect,” meaning people don’t want to sell a home where they can pay a 2.75% mortgage interest rate and trade up to another home where the price is probably around 7% today.
Harvard’s Joint Center for Housing predicts that annual gains in home improvement and maintenance spending will drop “sharply” by the middle of next year, but only to a growth rate of 6.5% from an unusually high 16% rate.
“The real estate and remodeling market is definitely slowing down from the unusually high and unstable growth rate that followed after the recession caused by the pandemic,” said Carlos Martín, project director of the Center’s Remodeling Futures Program. “Spending on home improvements will continue to face headwinds from declining home sales, rising interest rates and rising costs of contractor labor and building materials.”
Despite inflation in almost everything in the economy, consumers do not seem to want to spend more on their homes. Both Lowe’s and Home Depot showed a drop in the number of sales but a jump in the dollar amount of those sales. It leads to an increase in revenue.
“There is inflation in the market and elasticity, but not to the level that was anticipated, and customers have shown that they are 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 reported having canceled a home improvement project in 2022. Meanwhile, 37% completed a project in 2022 and almost a quarter said they. who plans to start a home improvement project in the next 12 months.
“In addition, more than half of the homeowners we surveyed have no intention of selling or moving out of their current residences in the next 20 years or ever,” said Marine Sargsyan, Houzz staff economist.