Home Depot and Lowe’s highlight strong demand in earnings reports, but slowdown may be ahead

Home Depot and Lowe’s highlight strong demand in earnings reports, but slowdown may be ahead

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

Justin Sullivan | Getty Images

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

Home Depot and Lowe’s this week cited strong second-quarter sales from professionals including contractors, plumbers and electricians. Retailers said these customers have a healthy backlog of projects and plenty of pent-up demand for DIY.

Businesses are attributing the continued strength emerging from the peak of the pandemic to housing market conditions, saying people staying longer in their homes could spur renovations. Since the beginning of this year, the average interest rate for 30-year fixed-rate mortgages has almost doubled and housing starts have declined significantly. This month, the National Association of Homebuilders/Wells Fargo housing market index fell into negative territory for the first time since the pandemic began.

“What’s bad for the home builder is often not necessarily bad for the home handyman,” Lowe CEO Marvin Ellison told CNBC.

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

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

“We’ve seen home prices rise nearly 40% over the past two years, which has really changed the balance sheet for the North American homeowner,” McPhail told CNBC. “When you see your home increasing in value, you’re more likely to invest more in it.”

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

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 Peter Keith, an analyst at Piper Sandler.

“There’s a little lag effect,” Keith told CNBC. “We believe this decline in home equity attracting will eventually show up in pro spending.”

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

Raymond James analyst Bobby Griffin sees the risk in attracting home equity but similarly focuses primarily on home prices.

“Interest rates are going up, it’s not that appealing to take money out of the house anymore,” Griffin told CNBC. “But you still have that equity, so it’s still attractive to invest in.”