Housing slowdown isn’t hurting Home Depot and Lowe’s — will it last?

Headwinds slowing the U.S. housing market are working in favor of home improvement retailers like Home Depot ( HD ) and Lowe’s ( LOW ), but it’s unclear how long that momentum will last.

Atlanta-based Home Depot reported a better-than-expected quarter amid rising interest rates and economic uncertainty. US same-store sales rose 4.5% year-over-year during the quarter. Similarly, North Carolina-based Lowe’s reported higher sales and raised its full-year earnings guidance, another sign that consumers are spending on remodeling.

Executives at both companies struck a bullish tone for the outlook next year amid weaker home sales, home prices and construction as mortgage rates now exceed 7%.

“We’re seeing another interesting dynamic. As mortgage rates rise, our customer is more likely to stay put and start a project,” Home Depot CFO Richard McPhail said on the company’s earnings call. “It’s so much better.”

US pre-owned home sales fell for a ninth straight month in October as rapidly rising mortgage rates deterred many potential buyers, the National Association of Realtors reported on Friday. Prices have more than doubled compared to the beginning of the year.

A sharp decline in demand has discouraged sellers.

An employee works in the lumber section at a Home Depot store in Alhambra, California on May 4, 2022. (Photo by Frederick J. BROWN / AFP) (FREDERIC J. BROWN/AFP via Getty Images)

For example, the number of houses sold at the end of October decreased by 0.8% to 1.22 million. both from September and a year ago. New listings are down from a year ago, suggesting sellers are reluctant to list their homes.

At the same time, although inflation has cooled significantly, prices still remain high. Nationwide, home prices rose 11.4% year-over-year, according to Corelogic.

This provided the hosts with a soft nest egg. Homeowners are sitting on an estimated $20 trillion in home equity that they could use for home improvements.

Data from the Federal Reserve showed that home equity line of credit (HELOC) balances rose by $3 billion, the second consecutive quarterly increase after balances declined.

“This unique combination of factors is causing homeowners to trade up, preferring to invest in renovating and renovating their current home to meet their family’s evolving needs rather than buying a new home,” Marvin Ellison, Lowe’s chairman, chief executive officer and president, said in a statement. said in the call.

However, some Wall Street analysts and other industry observers argue that the home improvement business could feel the effects of the housing market slowdown.

“Any potential decline in home prices could hamper the return consumers receive on their home investment after several years of record spending.[ing] category, according to Raymond James analyst Bobby Griffin, in a note after Home Depot’s earnings.

Housing woes continue to fuel concerns about renovation demand, especially improvements that occur shortly before and after home sales. Sellers often spend on renovations and updates to attract buyers, while new homeowners spend on projects to make their home their own.

According to Harvard University’s Joint Center for Housing Research’s Remodeling Futures Program, the annual earnings on owner-occupied home improvements and repairs are expected to decline sharply by the middle of next year.

“Housing and housing 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 redevelopment futures program. “Home improvement spending will continue to be impacted by declining home sales, rising interest rates and rising costs of contractor labor and building materials.”

Dani Romero is a reporter for Yahoo Finance. Follow him on Twitter @daniromerotv

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