Home Depot and Lowe’s: A Turnaround in Sight After Fed Rate Cut
The long-awaited turnaround for the home improvement sector is finally on the horizon. After a challenging period, marked by a soft housing market, the recent Federal Reserve interest rate cut has sparked new optimism for retail giants like Home Depot (HD) and Lowe’s (LOW).
The downturn over the past couple of years has put a strain on these retailers. But with interest rates finally lower, the industry is poised for a resurgence. Daryl Fairweather, chief economist at Redfin, sums it up perfectly: “Now that interest rates are lower, we will definitely, first and foremost, see more demand for housing.”
The Impact of Interest Rates on the Housing Market
The Challenges Faced by Home Improvement Retailers
Homeowners and potential buyers have faced rising housing prices and escalating interest rates, leading to delays in moves and renovations. This has had a profound impact on existing home sales, which plummeted to a 10-month low in August, according to data from the National Association of Realtors.
During Home Depot’s Q2 earnings call, CEO Ted Decker attributed weaker spending on home improvement projects to “higher interest rates and greater macroeconomic uncertainty.” This trend is evident in Home Depot’s same-store sales, which declined by 3.3%—marking the seventh consecutive quarter of negative sales growth.
Meanwhile, Lowe’s CEO Marvin Ellison shared similar concerns, stating that “elevated interest rates and inflation” have kept DIY customers “on the sidelines waiting for some form of an inflection to take place.” The company reported a 5.1% decline in same-store sales and revised its 2024 full-year guidance downwards.
Optimism from Recent Rate Cuts
Now, with the expectation of easing interest rates, a renewed sense of optimism is taking hold. Mortgage rates have dipped more than a percentage point since May, hitting their lowest levels in two years. This shift could potentially stimulate demand, as Charles Dougherty, a senior economist at Wells Fargo, explained: “Lower rates could help ease the mortgage rate lock-in effect and unleash some supply.”
What is the Mortgage Rate Lock-In Effect?
- The mortgage rate lock-in effect refers to homeowners who secured ultra-cheap mortgages when interest rates were low, now hesitant to move and lose their favourable rates.
- Easing interest rates may encourage these homeowners to sell, leading to increased activity in the housing market.
Wells Fargo estimates that existing home sales will reach an annualised rate of 4.13 million by the end of this year and 4.37 million in 2025. This is a significant contrast to the pandemic housing boom, which saw total existing home sales peak at a staggering 6.12 million annualised rate.
Positive Momentum for Home Improvement Stocks
As optimism returns, home improvement retailers like Floor & Decor (FND), Lowe’s, and Home Depot could see a surge in business. In September, Home Depot’s stock rose by 11%, while Lowe’s and Floor & Decor recorded gains of 10% and 15%, respectively. Bank of America analyst Robert Ohmes suggests that the potential for pent-up demand for both existing and new home sales could benefit home improvement stocks more than in previous rate cut scenarios.
What Should We Expect?
- A significant uptick in existing home sales could provide a robust tailwind for these companies.
- Floor & Decor, in particular, stands to benefit as homeowners often focus on flooring projects before and after selling their homes. The average household’s spending on flooring jumps 160% in the six months leading up to a move.
However, it’s essential for investors to temper their expectations. While the Fed’s rate cuts could indicate an inflection point, Dougherty notes that “a full-fledged rebound is still kind of off in the distance.”
Short-Term Demand Challenges
Consumers will still need to apply for lower mortgages, and many may hold off, waiting for further rate cuts. This delay could create a temporary drag on demand. Stifel analyst Andrew Carter, who maintains a Buy rating on Floor & Decor and a Hold on Lowe’s and Home Depot, expects continued soft same-store sales guidance for the latter two companies. He anticipates that sales growth will remain flat to slightly up in 2025.
The New Home Market: A Silver Lining
Easing rates are also beneficial for the new home market. Builders have been actively stepping up their game, offering enticing incentives for newly constructed homes. Taylor Morrison (TMHC) CEO Sheryl Palmer shared her insights, stating that the homebuilder plans to increase the number of newly built homes by 10% annually, expecting to close 12,600 to 12,800 homes by the year’s end.
Building a Brighter Future
- Palmer noted that consumer demand and faster building capabilities have contributed to this growth.
- Although the cost of building remains flat, labour costs have become a sticking point.
Investments in Pro Businesses
Traditionally, Lowe’s has catered more to the DIY consumer base, but both companies are investing heavily in their professional segments. Home Depot recently completed its $18.25 billion acquisition of SRS Distribution, a key distributor for residential professional customers.
This investment signals both companies’ commitment to diversifying their offerings and adapting to changing consumer needs.
Final Thoughts: A Bright Future Ahead
In summary, while the home improvement sector has faced significant challenges over the past few years, the recent Fed rate cuts are ushering in a wave of optimism. As demand for housing is set to increase, we may finally see a turnaround for major players like Home Depot and Lowe’s.
For investors, the key takeaway is to stay informed and be prepared for both short-term challenges and long-term opportunities. The future of home improvement is brighter, and with the right strategies in place, both companies could emerge stronger than ever.
