Washington, DC
CNN
—
After three straight years of sales growth, Home Depot went into reverse in the first quarter, and sales and profits were expected to tumble again in the second quarter when the company announced its earnings Tuesday.
It might be because Americans rarely feel worse about housing.
Only 18% said it was a “good time to buy” according to July’s Home Purchase Sentiment Index from Fannie Mae, matching an all-time low.
Unsurprisingly, people continue to attribute the challenging housing conditions to high home prices and unfavorable mortgage rates, said Doug Duncan, Fannie Mae senior vice president and chief economist. In July, median home prices dropped year over year, but remained just shy of record highs. Meanwhile the average interest rate for a 30-year, fixed-rate mortgage has been above 6.5%, closing in on 7%, since the end of May.
“The share of consumers expecting home prices to continue to rise has also been on a steady climb since March, which may only add to perceptions of unaffordability,” Duncan said. “We have not seen much movement in the ‘good time to sell’ component over the last few months, an indication that the current low levels of existing homes for sale will likely continue to persist in the near term.”
Home buying is less affordable now than it has been for decades.
All this – ultra low interest rates keeping people from selling, high home prices and higher mortgage rates keeping people from buying – suggests that a lot of people are hunkering down in their current home.
One might expect this to be a good time for Home Depot – homeowners who aren’t able to move up to a home with the ‘dream kitchen’ might be making improvements to their own home. But Americans appear to be tapping the breaks on renovation projects.
The US home improvement market is about $1 trillion, according to a July report on the home improvement industry from Bank of America Global Research, with Home Depot commanding 17% of market share, Lowe’s, by comparison, has 10%, in what remains a relatively fragmented industry.
Spending on home improvement during the pandemic – between 2020 and 2022 – grew at an outsized pace due to a combination of a home buying frenzy and people’s need for improved space as they stayed at home. Example household balance sheets, plus price inflation in home improvement goods and services, boosted the industry.
“As we look ahead, we expect spending growth to pause as homeowners anticipate softening home prices, slowing wage growth, and a potential recession,” the Bank of America analysts wrote in the report.
Following a peak in year-over-year growth in mid-2021, home improvement spending has been decelerating and turned lower year-over-year in early 2023, according to Bank of America. While some factors become somewhat more favorable for home spending improvement in the second half of 2023, the analysts expect the full year to end up flat, and for this trajectory to continue into 2024 with some periodic bumps along the way.
Another hit on the home renovations industry is fewer existing home sales, which are down about 20% from a year ago. Typically, for every new construction home sold in the last ten years, approximately nine existing homes changed hands, supporting renovation activity according to Bank of America. The home improvement market is not only larger than that of new home construction, but is significantly less volatile.
But now the share of new homes is rising and the share of existing homes is dropping. With fewer existing homes changing hands than in recent years as homeowners hunker down with their sweet low mortgage rates, there is less demand for the home improvements made when moving into a home.
Along those lines, market watchers see Home Depot earnings per share weakening in the second quarter, with an analysts’ estimate of $4.45 a share, according to Refinitiv, compared to $5.05 the same quarter last year. Analysts polled by Refinitiv are forecasting about a 3.5% decline in the second quarter, year-over-year.
But Bank of America analysts suggested that some long term trends are favorable for the home improvement industry.
The average age of a first time buyer is 36 years old, according to the National Association of Realtors. The large cohort of Millennials are still buying homes, because of the phase of life they are in. Those demographics remain favorable for the home improvement industry.
Another favorable trend for home improvement is the continued move to rural and suburban areas, the analysts found.
“The shift from urban apartments and townhomes to suburban and rural properties should support growth in spending on home-related goods,” the analysts wrote.
Taken together the two trends are good news for home renovation retailers like Home Depot.
More than three quarters of Millennials expressed a preference for living in suburban or rural areas rather than urban areas, according to the Bank of America study.
“For the large home improvement retail chains, which also concentrate their stores predominantly in suburban and rural markets, the migration of the US population out of dense urban areas with smaller homes into suburban and rural markets with larger homes is a beneficial trend.”
For the first quarter, Home Depot had reported sales fell 4.5% at stores open at least a year and its income decreased 6.4% from the same stretch a year ago.
Home Depot’s total revenue for the first quarter slipped 4.2% versus first-quarter 2022, to $37.3 billion.