Works as a home improvement contractor in Cambridge, Massachusetts.
Suzanne Kreiter | Boston Globe | Getty Images
As the U.S. housing market tumbles from pandemic-related highs, home improvement sellers like it Home Depot and Lowe’s I don’t feel the same pain. In fact, they work better than expected.
While home building and home remodeling are related, the market forces behind each can be different, and that’s what’s happening now.
Home Depot and Lowe’s reported strong quarterly earnings on Tuesday and Wednesday, respectively. Lowe’s shares rose nearly 5% on Wednesday. Managers of both companies spoke highly of the prospects of their businesses in 2023. This is due to a significant slowdown in home sales, prices and construction due to a massive jump in mortgage rates.
Home Depot CFO Richard McPhail pointed to a “fix it in place” mentality among current homeowners who want to sell but change their minds because they can’t afford top dollar.
“All we can do at this point is repeat what our customers have told us,” McPhail said. “There’s a dynamic in the market that we haven’t seen much of. With mortgage rates going up, homeowners are staying put.”
According to CoreLogic, home prices were still 11.4% higher in October than in October 2021, but this year-over-year comparison has been declining for several months. Prices are falling from month to month at a faster rate than normal seasonal trends.
Still, in the early years of the pandemic, an unprecedented surge in home prices fueled by record-low mortgage rates and the desire of many Americans to move to larger homes in the suburbs provided homeowners with large amounts of equity. Prices have increased by more than 40% in just two years.
According to Black Knight, at the end of the first quarter of this year, before a sharp increase in mortgage rates caused the housing market to collapse, homeowners had a collective $11 trillion in so-called tappable equity. This is the amount the borrower can take out of their home while still putting down 20% equity. This capital increased by an unprecedented 1.2 trillion dollars in the first quarter of this year alone. That’s about $207,000 per homeowner.
According to Lowe’s CEO Marvin Ellison, this capital is part of a three-pronged driver of home improvement. He pointed to rising home prices, the age of the U.S. housing stock (about 40 years old, the oldest since World War II) and high levels of personal disposable income.
“So when you look at all of these factors, these things bode well for home improvement and we feel really good about our current trends,” Ellison said in an interview on CNBC’s “Squawk Box” on Wednesday.
Construction and reconstruction
Home builders, some of whom work in both home construction and home remodeling, are not seeing much of an uptick in their market. According to the National Association of Home Builders, homebuilder sentiment hit its lowest level in a decade for the eleventh month in November.
However, NAHB predicts that the remodeling sector will fare the best among the residential construction submarkets during this current housing downturn.
“The growth rate for improvement spending will slow due to a decline in existing home sales,” said NAHB chief economist Robert Dietz. “However, an aging housing stock, trends in working from home and reduced household mobility all favor redevelopment spending.”
Dietz also points to “interest rate lock-in effects,” meaning people are reluctant to sell a home where they can pay a 2.75% mortgage and trade in another home where the rate will be around 7%. today.
By the middle of next year, the annual gain on home improvement and maintenance costs will fall “sharply,” but from an unusually high 16% growth rate, to just 6.5%, according to Harvard’s Joint Housing Center.
“The housing and redevelopment markets are certainly slowing from the exceptionally high and unsustainable growth rates that followed the pandemic-induced recession,” said Carlos Martin, project director of the Center’s Rebuilding Futures Program. “Home improvement spending will continue to be negatively impacted by declining home sales, rising interest rates and rising costs of contractor labor and building materials.”
Despite inflation in almost everything in the economy, consumers want to spend more on their homes. Both Lowe’s and Home Depot saw a drop in the number of sales, but a jump in the dollar amount of those sales. This led to an increase in their income.
“There is inflation and elasticity in the market, but not as much as we expected, and the customer is showing us they are resilient,” Home Depot’s McPhail said.
A recent survey of nearly 4,000 homeowners by home improvement and design site Houzz found that only 1% of homeowners are canceling a home improvement project in 2022. they were planning to start a home improvement project in the next 12 months.
“Furthermore, more than half of the homeowners we surveyed have no intention of selling or moving in the next 20 years or ever,” said Marine Sarkisian, Houzz HQ Economist.