Home Depot and Lowe’s cite strong demand, but easing may be coming

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

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Home improvement spending doesn’t appear to have been hit hard by the slowdown in the US housing market, but analysts say the strength may not last.

Home Depot and Lowe’s cited strong second-quarter sales this week from professionals such as contractors, plumbers and electricians. Retailers said those customers had a backlog of healthy projects and strong pent-up demand for home improvement.

Companies attribute the continued strength resulting from the peak of the pandemic to housing market conditions because, they say, people staying in their homes longer could spur renovations. Since the beginning of this year, the average rate for 30-year fixed rate mortgages has almost doubled and housing starts have fallen considerably. This month, the National Association of Homebuilders/Wells Fargo housing market index fell into negative territory for the first time since the pandemic began.

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

Ellison said weak housing starts and high mortgage rates could encourage homeowners to stay where they are and choose to renovate their current homes. He noted that more than half of American households are over 40 years old.

Home Depot CFO Richard McPhail also noted that rising home prices are “probably the strongest underpinning” of home improvement demand.

“We’ve seen home prices appreciate almost 40% over the past two years, which has really transformed the North American homeowner’s balance sheet,” McPhail told CNBC. “When you see your home going up in value, you’re more likely to invest more in it.”

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

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

“There’s a slight lag effect,” Keith told CNBC. “We believe that this decline in home equity extraction will eventually show up in professional spending.”

Keith said the decline could hit contractors and other home improvement professionals by the end of this year or early next.

Bobby Griffin, an analyst at Raymond James, sees the risk of home equity extraction, but also focuses on home prices.

“Rates are going up, it’s not as attractive to take money out of your house anymore,” Griffin told CNBC. “But you still have that equity, so it’s still worth investing.”

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