​​Are Home Improvement Chains Too Pessimistic Over Recovery Prospects?

Both Home Depot and Lowe’s saw quarterly same-store sales return to growth after eight straight quarters of declines but offered soft guidance for the current year due to the fallout from ongoing high mortgage rates.

Home Depot’s same-store sales grew 0.8% in the fourth quarter. On an analyst call, the home improvement chain’s CEO Ted Decker said results exceeded expectations “as we saw greater engagement in home improvement spend, despite ongoing pressure on large remodeling projects.”

Ten of Home Depot’s 16 departments posted positive comps, but weakness was seen in purchases supporting larger discretionary projects, such as kitchen and bath remodels, where customers typically use financing. For the current year, Home Depot forecast same-store sales growth of only 1%, with management assuming no change in the mortgage environment nor improvements in housing turnover.

A report last year from brokerage Redfin found only 25, or 2.5%, of every 1,000 U.S. single family homes and condos/townhouses changed hands in the first eight months of 2024, marking the lowest turnover rate in at least three decades.

The lean turnover rate was attributed to elevated mortgage rates, with more than three-quarters of mortgaged U.S. homeowners having secured a rate under 5%, below current rates between 6% and 7% in recent months. This creates a “lock-in effect,” where many homeowners hold off on selling and buying another home using a higher rate and also defer major DIY projects with no near-term plans to sell. Other factors feeding lower housing turnover include record high prices for U.S. homes, significantly smaller housing supply versus pre-pandemic levels, and economic and political uncertainty.

On the call, Decker said Home Depot’s customer remains “very healthy,” with rising incomes, home equity values vaulting 50% since the end of 2019, and the benefit from appreciating stock market values. He suspects homeowners will eventually tap that expanding home equity to tackle larger remodeling projects once they realize rates are “highly unlikely” to return to lows seen in recent years. Decker added, “We’re just not sure that turn comes in 2025 at a dramatically accelerated pace.”

Fannie Mae predicts that the 30-year mortgage rate will remain at or above 6.5% for all of 2025.

Lowe’s same-store sales inched up 0.2% in the fourth quarter, also above expectations, as mid-single digit growth with its Pro customers — or professionals such as contractors, landscapers, plumbers, and electricians — offset weakness in discretionary spending from its DIY homeowner customers, particularly around bigger ticket projects.

For the current year, Lowe’s forecast same-stores sales to be flat to up 1%, with officials expecting the broader home improvement market to be flat, driven by repair and maintenance rather than upgrade projects.

Marvin Ellison, president and CEO of the home improvement chain, noted on an analyst call that several factors, including home price appreciation, disposable personal income growing faster than inflation, and the oldest existing housing stock in U.S. history, will continue to lead homeowners to invest in home repairs and upgrades. He added, “And we anticipate that some homeowners will begin to tap into record levels of equity in their homes to fund larger renovation projects.”

However, he pointed out that mortgage rates are higher than they’ve been in more than two decades. This in turn is “creating a significant gap between today’s rate for homebuyers and the lower rates many homeowners currently enjoy,” leading to the lowest pace of existing home sales in the U.S. in nearly 30 years. He added, “Although it’s difficult to predict the timing of when we’ll see lower rates and increased home improvement demand, we remain confident in the medium- to long-term outlook of our business.”