Here’s why Home Depot and Lowe’s are booming in a housing market bust

by | Nov 16, 2022 | Business

A home improvement contractor works on a house in Cambridge, Massachusetts.Suzanne Kreiter | The Boston Globe | Getty ImagesAs the U.S. housing market falls hard from its pandemic-driven highs, home improvement retailers like Raymond James downgrades Home Depot, says there are challenges ahead despite solid earnings report13 hours agoHome Depot and Lowe’s reported strong quarterly earnings Tuesday and Wednesday, respectively. Lowe’s stock rose 3% Wednesday. Executives at 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 financial chief Richard McPhail pointed to an “improve in place” mentality among current homeowners, who might have wanted to sell but changed their minds because they could no longer command top dollar.”All we can do at this point is repeat what our customers are telling us,” McPhail said. “There is a dynamic we don’t see much in the market. With rising mortgage rates, homeowners are staying in place.”With rising mortgage rates, homeowners are staying in place.Richard McPhailHome Depot CFOHome prices are 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-to-month at a far faster pace than normal seasonal trends.Still, the unprecedented run-up in home prices during the first years of the pandemic, fueled by record low mortgage rates and a desire for many Americans to move to larger homes in suburban areas, gave homeowners sizeable amounts of equity. Prices jumped 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 is the amount a borrower can take out of their home while still leaving 20% equity in it. That equity grew by an unprecedented $1.2 trillion in the first quarter of this year alone. Per homeowner, it amounts to roughly $207,000 in tappable equity.That equity is part of a three-pronged driver of home improvement, according to the CEO of Lowe’s, Marvin Ellison. He pointed to home price appreciation, the age of the U.S. housing stock — which is roughly 40 years old, the oldest since World War II — as well as high levels of personal disposable income.”So when you look at all those factors, those things bode well for home improvement, and we feel really good about our current trends,” said Ellison in an interview Wednesday on CNBC’s “Squawk Box.”Building vs. remodelingHomebuilders, some of whom work in both home construction and home renovation, don’t feel quite so bullish on their market. Builder sentiment dropped in November for the eleventh straight month, 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 fare the best among the residential const …

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