Home Improvement Sales Could Rise Following The Slight Slowdown In Q1

July 15th, 2014 by Trefis Team

After the housing market in the U.S. witnessed strong last couple of years, existing and new home sales relatively declined this year. Sales of existing homes in particular, which form around 90% of overall house sales, were the most hit in the first three months of the year. Home sales are linked with factors such as mortgage rates, home prices, and consumer affordability. Weak economic conditions in the first quarter this year, partly affected by an unusually cold winter, resulted in a negative 2.9% GDP growth, including a 4.2% decline in real residential fixed investment. [1] Businesses of home improvement retailers such as Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) are impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Q1 results for both these retailers missed consensus estimates, as bad weather conditions kept consumers from spending on home improvement, primarily on outdoor projects. However, sales in the home improvement market are expected to improve going forward due to pent-up demand, as consumers engage in repair and retrofitting activities. In addition, macroeconomic factors are also starting to favor growth in this market, as seen by the increases in home sales in the last couple of months.

We have a Trefis price estimate of $81.48 for Home Depot’s stock, which is roughly 2.5% above the current market price.

Our complete analysis for Home Depot’s stock

House Sales Gain Momentum In The U.S.

Hurt by the overall slowdown in economic activity, along with high lending rates, sales of existing homes declined from a seasonally adjusted annual rate (SAAR) of 4.87 million in December to 4.62 million in January, 4.6 million in February and 4.59 million in March. [2] In fact, sales in March represented a year-over-year decline of 7.5%. New home sales also remained low, and fell to a SAAR of 384,000 in March, from 449,000 in February. However, following the first quarter, house sales have picked up in the U.S. Existing homes sales improved in both April and May to reach a SAAR of 4.89 million, which is the highest sales figure since seen in October last year, although 5% lower than May 2013 levels.

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We have a $43.47 Trefis price estimate for Lowe’s stock, which is around 8% below the current market price.

See our complete analysis of Lowe’s here

On the other hand, new home sales rose to a SAAR of 504,000 in May, up an impressive 17% year-over-year, and the highest sales figure in the last twelve months. Following tepid growth in the first quarter of the year, the domestic housing market seems to be gaining momentum, supported by declining lending rates and unemployment rate, and improving consumer affordability.

  • According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage declined to 4.12% in the first week of July from 4.53% in early January. [3] Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates had previously been on a rise since the first half of last year, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. [4]
  • Home sales are also impacted by the general business environment that affects job creation and incomes. The U.S. unemployment rate fell to 6.1% in June, the lowest rate since recession started in September 2008. [5] This bodes well for the housing industry as job creation would facilitate income growth and consequently also support home sales.
  • Rising house prices are closely associated with consumer affordability. After decreasing by more than 30% during the recession, home prices picked up momentum in 2012-2013, rising to within 20% of the peak 2006 levels. [6] Home Depot expects home prices to grow by 6% in 2014, which although lower than the rise in 2013, reflects steadily growing incomes, affordability, and consumer demand. While during their peak in 2006, home prices were almost 40% overvalued, as compared to metrics such as cost-to-rent and incomes, the domestic housing industry remained 4% undervalued based on the same fundamentals at the end of last year. [6]

With the U.S. economy expected to return to positive growth in the latter half of the year, a general conducive business environment and increasing incomes could bolster new and existing home sales, as well as encourage housing starts. This is expected to boost sales for the home improvement retailers Home Depot and Lowe’s, which expect comparable sales growth of 4.6% and 4% respectively in 2014. According to the Home Improvement Research Institute, home improvement product sales are expected to rise to $309 billion this year, up 6.5% year-over-year, after rising 4.2% in 2013. [7]

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Notes:
  1. U.S. GDP growth rate [↩]
  2. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
  3. Mortgage rates for 30-year U.S. loans fall for third week, July 2014, bloomberg.com [↩]
  4. historical 30-year fixed-rate [↩]
  5. U.S. unemployment data [↩]
  6. What’s ahead for 2014 housing market [↩] [↩]
  7. Home improvement research institute forecasts [↩]