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Home Depot reported that same-store sales declined 3.2% in 2023 amid a slowdown in the housing market and predicted “a year of continued moderation” in 2024 with same-store sales projected to slide 1%.
"I'd say we have a neutral look on housing for 2024," Home Depot CEO Ted Decker said on the retailer’s fourth-quarter earnings call. "We don't think there's incremental pressure, nor do we think that we're quite ready for a hockey stick recovery."
Decker likened the demand seen during the pandemic to a “giant hurricane” as sheltering Americans found time to tackle household projects. Same-store sales at Home Depot grew 19.7% in 2020, 11.4% in 2021 and 3.1% in 2022.
Sales turned negative in 2023 as spending shifted toward experiences rather than goods while discretionary purchases, particularly on big-ticket items, were postponed due to inflation. Existing home sales also slid due to the impact of four interest rate increases by the Fed, as well as limited housing inventory and lower affordability.
For 2024, Richard McPhail, Home Depot's CFO, told analysts that many pressures felt in 2023 “are unlikely to repeat,” citing the multiple interest rate hikes, the significant drop in existing home sales, and high lumber deflation.
However, McPhail told CNBC that customers are still putting off major projects, particularly those requiring a loan, due to elevated borrowing costs. He further told analysts that expected weakness in consumer spending and “the effects from pull forward of demand during the pandemic” will likely weigh on revenue growth in 2024.
Home furnishings and furniture chains are also feeling the housing squeeze. In the third quarter of 2023, comparable brand revenue decreased by 14.6% at Williams-Sonoma, revenue was down by 13.6% at RH (formerly Restoration Hardware), and net sales sunk by 22.9% at Hooker Furnishings.
Home Depot's subdued guidance comes as the Mortgage Bankers Association (MBA) last week reported that the average rate for a 30-year mortgage jumped above 7%, its biggest weekly jump since last fall. The spike resulted in a drop in applications for new mortgages. While below October’s recent peak of 8%, the rate remains well above levels of around 3% in 2022.
Beyond borrowing costs, prospective home buyers are facing sticker shock. According to the Federal Reserve Bank of St. Louis, home prices are up 46% since late 2019. Finally, the lack of available supply, partly caused by current homeowners’ reluctance to give up low-rate mortgages, is another factor keeping home prices high.
The Federal Reserve in December forecast three interest rate cuts in 2024, but higher-than-expected inflation readings in recent months have signaled to investors that a rate cut won’t happen until at least the spring.
On the analyst call, Decker noted that Home Depot has in recent quarters been discussing the "Fed's stance of higher for longer," regarding leaning toward higher interest rates. He added, "I think now we have an appreciation that longer is going to go through the first half of this year."