Home Depot and Lowe’s cite strong demand, but softening could be ahead

Spending on residence enchancment doesn't seem to have taken an enormous hit with the slowdown within the U.S. housing market, but analysts say the energy might not final.

Home Depot and Lowe's this week cited strong second-quarter gross sales from professionals equivalent to contractors, plumbers and electricians. The retailers mentioned these clients have a wholesome backlog of tasks and loads of pent-up demand for residence enchancment.

The firms are chalking up the continued energy popping out of the peak of the pandemic to housing market circumstances as a result of, they are saying, folks staying put of their houses longer could spur renovations. Since the beginning of this yr, the common charge on the 30-year mounted mortgage has almost doubled and housing begins have declined considerably. This month, the National Association of Homebuilders/Wells Fargo Housing Market Index dropped into the adverse territory for the primary time since early within the pandemic.

Home Depot's Q2 earnings are 'terribly strong,' says Oppenheimer's Brian NagelSquawk Box

"Oftentimes, what is bad for the home builder is not necessarily bad for the home improvement," Lowe's CEO Marvin Ellison advised CNBC.

Ellison mentioned low housing begins and excessive mortgage charges could incentivize owners to remain the place they’re and select to renovate their present houses. He famous greater than half of U.S. houses are over 40 years outdated. 

Home Depot's chief monetary officer, Richard McPhail, additionally famous that the rise in residence costs is "probably the strongest underpinning" of residence enchancment demand. 

"We've seen home prices appreciate by almost 40% over the last two years, which has really transformed the balance sheet of the North American homeowner," McPhail advised CNBC. "When you see your home increase in value, you are more likely to invest more in it."

Appreciating residence costs also can permit for bigger residence fairness loans, which owners use to fund renovations. KeyBanc analyst Bradley B. Thomas famous that Home Depot cites residence costs as "one of the most important leading indicators of home improvement demand." The median worth for a house offered in July was $403,800, which is almost 11% increased than throughout the identical month a yr earlier.

Lowe's Q2 earnings are usually not unhealthy, but weaker than Home Depot, says Oppenheimer's Brian NagelSquawk Box

But with rates of interest now increased, residence fairness loans are falling after hitting their highest stage since 2007 within the first quarter of the yr, mentioned Piper Sandler analyst Peter Keith.

"There's a bit of a lag effect," Keith advised CNBC. "We do think this drop off in home equity extraction will eventually show up in the pro spending."

Keith mentioned the drop off could hit contractors and different residence enchancment professionals by the tip of this yr or the start of subsequent.

Bobby Griffin, an analyst from Raymond James, sees the chance to residence fairness extraction, but equally has most of his give attention to residence costs.

"Rates go up, it's not as attractive to take money out of your home anymore," Griffin advised CNBC. "But you still have that equity, so it is still attractive to invest."

based mostly on website supplies www.cnbc.com

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