Home Depot and Lowe’s cite strong demand, but softening could be on the horizon

Home improvement spending doesn’t appear to have taken a major hit from the slowdown in the US housing market, but analysts say the strength may not last.

Home Depot and Lowe’s reported strong second-quarter sales this week from professionals such as contractors, plumbers and electricians. The retailers said those customers have a healthy backlog of projects and a lot of pent-up demand for home improvements.

The companies attribute the continued strength of the peak of the pandemic to housing market conditions, as they say people staying longer in their homes can encourage renovations. Since the beginning of this year, the average interest rate on the 30-year fixed mortgage has almost doubled and the number of new homes has fallen sharply. This month, the National Association of Homebuilders/Wells Fargo Housing Market Index fell into negative territory for the first time since the start of the pandemic.

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

Ellison said low home prices 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 homes in the US are over 40 years old.

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

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

Valuing home prices can also drive larger mortgages, 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 for a home sold in July was $403,800, up nearly 11% from the same month a year earlier.

But with interest rates higher, mortgages 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 bit of a lag effect,” Keith told CNBC. “We think this decline in equity extraction will eventually show up in pro spending.”

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

Bobby Griffin, a Raymond James analyst, sees the risk of equity extraction, but also focuses primarily on house prices.

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

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