Residential renovation contractor in Cambridge, Massachusetts.
Susanne Kleiter | Boston Globe | Boston GlobeGetty Images
Homebuilding and home renovation are perfectly connected, but the market forces behind each can be different, and that’s what’s happening right now.
Home Depot and Lowe’s Report Strong Quarterly Earnings Tuesday When Wednesday, Respectively. Lowe shares jumped about 5% on Wednesday. Executives from both companies expressed bullish views on their business prospects for 2023. This is because home sales, prices and construction have all been significantly weakened by a massive rise in mortgage rates.
Richard McPhail, Home Depot’s chief financial officer, noted that there is an “improve in place” mentality among current homeowners.
“At the moment all we can do is repeat what our customers are telling us,” McPhail said. , the homeowner is staying at the location.”
Home prices in October are still 11.4% higher than they were in October 2021, but their yearly comparison has shrunk for months, according to CoreLogic. It’s going down every month.
Still, the unprecedented rise in home prices in the first years of the pandemic, fueled by record-low mortgage rates and the desire of many Americans to move to larger homes in the suburbs, has pushed homeowners has brought a significant amount of wealth to the market. Prices have jumped more than 40% in just two years.
According to Black Knight, by the end of the first quarter of this year, homeowners held a total of $11 trillion in so-called tappable equity before a sharp rise in mortgage rates sent the housing market down. . This is the amount a borrower can take out of the house while leaving her 20% equity. That wealth also increased by an unprecedented $1.2 trillion in the first quarter of this year alone. That equates to approximately $207,000 of available assets per homeowner.
According to Lowe’s CEO Marvin Ellison, the stock is part of three pillars of home improvement. He pointed to rising house prices, the age of the US housing stock (about 40 years old, the oldest since World War II), and high levels of personal disposable income.
“Looking at all these factors, these things bode well for home improvement, and we’re really happy with the current trends,” Ellison said. In an interview on Wednesday’s CNBC’s “Squawk Box.”
Some home builders work in both home construction and home renovation, but they are less bullish in their market. Builder Sentiment Falls in November According to the National Association of Home Builders, it was the 11th straight month to reach its lowest level in a decade.
However, NAHB expects the renovation sector to fare best among the homebuilding submarkets during this current housing contraction.
NAHB chief economist Robert Dietz said a decline in existing home sales will slow the rate of improvement spending growth. “However, aging housing stock, the trend of working from home, and declining household mobility are all working in favor of remodeling spending.”
Dietz also mentions the “interest rate lock-in effect.” That is, people don’t want to sell his house with a mortgage rate of 2.75% and replace it with another house whose interest rate is likely to be around his 7%. today.
The Center for Multifamily Housing at Harvard University predicts that the annual rate of increase in home renovation and maintenance costs will decline “precipitously” by the middle of next year, but from an unusually high growth rate of 16% to a growth rate of just 6.5%. is staying.
Carlos Martin, Project Director of the Center’s Remodeling Futures Program, said: “Spending on housing improvements will continue to face headwinds from declining home sales, rising interest rates, rising contractor labor costs and rising costs of building materials.”
Despite inflation in every sector of the economy, consumers seem to want to spend more on their homes. Both Lowe’s and Home Depot showed declines in sales, but the value of those sales soared. That led to an increase in revenue.
Home Depot’s McPhail said, “There’s been inflation and resilience in the market, but not as much as we expected. Customers are showing that they’re resilient.
According to a recent survey of nearly 4,000 homeowners by home improvement and design website Houzz, just 1% of homeowners reported canceling their home improvement projects in 2022. was. planned to start a home improvement project within the next 12 months.
“Additionally, more than half of the homeowners we surveyed have no plans to sell or move their current homes in the next 20 years,” Houzz staff economist Marine Sargsyan said. increase.