After three straight years of sales growth, Home Depot headed into reverse in the first quarter, and sales and profits are expected to decline again in the second quarter when the company reports earnings on Tuesday.
Maybe it’s because Americans rarely feel bad about housing.
Just 18% said it was a “good time to buy” according to Fannie Mae’s July Home Buying Confidence Index, marking an all-time low.
Doug Duncan, Fannie Mae’s vice president and chief economist, said it’s not surprising that people continue to attribute difficult housing conditions to high home prices and unfavorable mortgage rates. In July, median home prices fell year-over-year, but remained near record levels. Meanwhile, the average interest rate on a 30-year mortgage has exceeded 6.5% and is close to 7% since the end of May.
“The proportion of consumers who expect home prices to continue to rise has also been on a steady rise since March, which may only increase perceptions of unaffordability,” Duncan said. “We have not seen much movement in the ‘good time to sell’ component over the past few months, which is an indication that the current low levels of homes for sale are likely to continue in the near term.”
Buying homes is now less expensive than it has been in decades.
All of this – extremely low interest rates that prevent people from selling, high housing prices, and high mortgage interest rates that prevent people from buying – suggests that many people are turning to their current homes.
One might expect this to be a good time for Home Depot — homeowners who can’t afford to move into a home with a “dream kitchen” might make improvements to their homes. But it seems that the Americans are taking advantage of the breaks in renovation projects.
The U.S. home improvement market is worth about $1 trillion, according to a July report on the home improvement industry from Bank of America Global Research, with Home Depot controlling 17% of the market share and Lowe’s, by comparison, having 10%. , in what is still a relatively fragmented industry.
Home improvement spending during the pandemic — between 2020 and 2022 — grew at a significant pace due to a combination of the home-buying frenzy and people’s need for improved space while they stay at home. Abundant household balance sheets, combined with price inflation in home improvement goods and services, have boosted the industry.
“As we look to the future, we expect spending growth to pause as homeowners anticipate declining home prices, slower wage growth, and a potential recession,” Bank of America analysts wrote in the report.
After peaking in year-over-year growth in mid-2021, home improvement spending slowed and declined year-over-year in early 2023, according to Bank of America. While some factors have become somewhat more favorable for home improvement spending in the second half of 2023, analysts expect the entire year to end flat, and for this trajectory to continue into 2024 with some cyclical bumps along the way.
Another hit to the home renovation industry has been a decline in existing home sales, which are down about 20% from last year. Typically, for every new construction home sold in the past 10 years, approximately nine existing homes have changed hands, fueling renovation activity according to Bank of America. The home improvement market is not only larger than the new home construction market, but it is considerably less volatile.
But the share of new homes is now rising, while the share of existing homes is falling. With fewer existing homes being changed hands than in recent years, as homeowners resort to lower mortgage rates, there is less demand for home improvements made when moving home.
Along these lines, market watchers see Home Depot’s earnings per share weakening in the second quarter, with analysts estimating $4.45 per share, according to Refinitiv, compared to $5.05 in the same quarter last year. Analysts polled by Refinitiv expect a 3.5% decline in the second quarter year-over-year.
But Bank of America analysts noted that some long-term trends are favorable for the home improvement industry.
The average age of a first-time buyer is 36, according to the National Association of Realtors. A large group of millennials are still buying homes, because of the stage they are in. These demographics remain favorable for the home improvement industry.
Another positive trend for home improvement is the continued move to rural and suburban areas, analysts found.
“The shift from condos and townhomes in urban areas to suburban and rural properties should support growth in spending on home-related goods,” the analysts wrote.
Together, the two trends are good news for home renovation retailers like Home Depot.
More than three-quarters of millennials expressed a preference to live in suburbs or rural areas rather than urban areas, according to a Bank of America study.
“For large home improvement retail chains, which also concentrate their stores mostly in suburban and rural markets, the migration of the U.S. population from dense urban areas with smaller homes to suburban and rural markets with larger homes is a beneficial trend.”
For the first quarter, Home Depot reported a 4.5% decline in sales at stores open at least a year, and its income fell 6.4% from the same period a year ago.
Home Depot’s total revenue for the first quarter decreased 4.2% compared to the first quarter of 2022, to $37.3 billion.