Monday, November 28, 2022
HomeNationalHome Renovation Retailers Surge

Home Renovation Retailers Surge

When people stop buying new homes, they renovate their existing homes.   This is clearly evident as the U.S. housing market drops from its pandemic-driven highs, home improvement giants like Home Depot and Lowe’s don’t seem to be feeling the the bottom line loss to corporate revenue. In fact, their numbers better than expected. While homebuilding and home remodeling are literally connected, the market forces propelling each can be different, and that’s what we see occurring in our current housing economy.

Home Depot
Home Depot superstore

Home Depot and Lowe’s reported strong quarterly earnings Tuesday and Wednesday, respectively. Lowe’s stock leapt 3% Wednesday. Executives at each  companiy spoke aggressively about the prospects for their business in 2023. This comes as home sales, prices and construction are all weakening significantly due to doubling mortgage rates over the past twelve months.

Home Depot financial chief Richard McPhail painted (no pun intended) a picture  of  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.”   This of course is being supported by mortgage company layoffs and lagging real estate sales reports. 

Home prices are still over 10% higher in October than they were in October 2021, according to CoreLogic, but that year over year comparison has been shrinking for several months. Prices are falling month-to-month at a far faster pace than normal seasonal trends. Still, the 2008-like run-up in home prices during the first years of the pandemic, fueled by government subsidized low mortgage rates and a desire for many Americans to move to larger homes in suburban areas, gave homeowners tremendous amounts of equity. Prices jumped more than 40% in just two years. In markets like Miami and Austin we saw over 100% price appreciation.  

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 NEW or Renovating?  

Homebuilders, some of whom work in both home construction and home renovation, don’t feel optimistic 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 construction submarkets during this current housing contraction.  Harvard’s Joint Center for Housing predicts that the annual gains in home improvement and maintenance spending will decline “sharply” by the middle of next year, but only to a 6.5% growth rate from an unusually high 16% rate.

Despite inflation in just about everything in the economy, consumers do seem to want to spend more on their homes. Both Lowe’s and Home Depot showed a drop in the number of sales but a jump in the dollar amount of those sales. That led to their increases in revenue.  “There is inflation in the market and elasticity, but not to the degree that we anticipated, and the customer shows us they are resilient,” said Home Depot’s McPhail.  A recent survey of nearly 4,000 homeowners by Houzz, a home improvement and design website, found that only 1% of homeowners reported having canceled a home improvement project in 2022. Meanwhile, 37% completed a project in 2022 and nearly one-quarter said they were planning to start a home improvement project in the next 12 months.  Stay tuned!   

 

ABOUT THE AUTHOR:

Mortgage Lending Executive James Ustun

James Ustun is a mortgage industry veteran with over 20 years experience building teams and developing relationships.  He is the co-founder of Home Team Mortgage a NY based mortgage lender with over 200 employees.  In addition to running Home Team, he is active in many youth sports leagues, invests in small businesses with unique business plans and also mentors young professionals entering the workforce. 

 

RELATED ARTICLES
- Advertisment -
Google search engine

Most Popular

Recent Comments