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Will Home Depot See a Housing Recovery in 2024?
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.”
Discussion Questions
How confident are you that the housing market and home-related retail purchases will see a healthy recovery in 2024?
What advice would you have for home improvement and home goods retailers to ride out the uncertainty?
Poll
Loading …BrainTrust
Jenn McMillen
Chief Accelerant at Incendio & Forbes Contributing Writer
Lucille DeHart
Principal, MKT Marketing Services/Columbus Consulting
Some of Home Depot’s latest slide is down to a continued reset as consumers turn away from spending on the home, but much is now being driven by an unfavorable economic backdrop. One of the main issues continues to be a very sluggish housing market. Over Home Depot’s final quarter, home sales in the US dropped by 7.2% over the prior year. This continues to suck a lot of demand out of the market as home movers are, traditionally, big spenders on improvement. Fortunately, there is some evidence that the housing market will pick up slightly in 2024, but it will remain soft by historic standards which will act as a continued drag on Home Depot’s performance. Not until interest rates come down will the housing market improve substantially.
Everyone is placing bets on the type of recovery we’ll see in 2024, and while many are hopeful, I think their degree of confidence isn’t that high. If interest rates and housing market overall are slightly better than flat, then home-related retail should start to recover, but it might be late in the year after the spring/summer moving season. Home goods retailers should continue to work on improving customer service, managing their inventory, and optimizing pricing.
I’m perplexed by (repeated) use of the term “housing market”: normally that refers to the construction, buying and selling of houses; and which, obviously, isn’t so hot right now. But one of Home Depot’s main markets is home improvement, which likely moves countercyclically to the former. So what the sales decline tells me is that HD’s status as a DIYer haven is overrated, and as wholesaler of building supplies is underrated. OK, enough semantic lectures: back to the question: I expect homebuilding will tick up; and insofar as I don’t think home improvement really declined, HD should see a better year.
Yes, I find today’s discussion to be a bit contradictory.
Moving is a major driver of home improvement spend. Those who move home spend significantly more than average in the first three years of moving as they remodel, decorate and otherwise make the home their own. This drives DIY and professional spending. This is especially so for ‘existing home’ sales versus those moving into new builds. There is a small counter dynamic of ‘improve not move’ where those who elect to stay put because they want to, but can’t, move spruce up their homes a little to compensate. However, that’s not working as powerfully right now because of general economic constraints.
Agreed. During the Great Recession, Home Depot actually did well because it shifted its marketing to highlight lower cost home improvements like painting. Lowe’s, on the other hand, was still touting new roofs and other large projects (I actually still have one of their ads in my head….the husband replaces the fence, then his wife wants a new roof and his daughter wants a big play set for the back yard….and I thought, how tone deaf!).
I think the ceo is about right. It’ll be an okay year, just not a barn burner
The housing market is very important to home improvement. In the Great Recession existing home sales dropped by 33.4% between 2006 and 2009. Home Depot’s North American sales plunged by 21.3% over the same period.
And the article zooms right by the massive, massive drop in lumber prices, which was a real impediment to home improvement projects during the pandemic. Is it perhaps the case that more people are buying now, but that the prices are lower, resulting in a top-line sales decrease? That’s not a bad problem to have, especially since sales were only down single-digit percents.
Home Depot CEO Ted Decker sees the near future as a comme ci, comme ça, in other words, not good, not bad, just neutral.
While Decker may know better than the rest of us, inflation, food prices, borrowing costs, and energy prices are all so high compared to before the current administration, consumers are limiting renovations at home.
Although this isn’t a place for politics, it’s quite relevant, since the two parties have opposing approaches to economics, and depending on the outcome in November, the home renovation industry might rebound relatively quickly. – Db
It appears that a housing market recovery is on the horizon, if interest rate cuts actually happen in 2024. Inflation is still persistent, but it has abated and this supports interest rate cuts. It’s also worth noting that we’re in an election year and this too could have an impact on consumer sentiment and market uncertainty in general. That all said, I am mildly optimistic about the home-related market in 2024, and especially the home improvement category. Home improvement retailers like Home Depot are well-positioned (as they always seem to be), for whatever comes. And while major projects and home buying may be impacted by interest rates, smaller DIY projects aren’t and this should help mitigate sluggishness.
Home Depot needs to shift their business strategy from major updates to small and affordable existing home updates. Paint, organization, DIY and Spring preparation. They also have to leverage their associates to help with elevating basket size and trading up. This is another weakness of their self-check out push. Flat/slight growth in 2024 will come from organic small wins as I don’t see the housing market recovering fully. Interest rates are preventing homeowners from moving from paid/fixed rates to new higher rates. Election uncertainty and international unrest is weighing in on consumer confidence as is the record high credit card debt. Pushing more “pay over time” options may help a little as well, but I see a soft year ahead for home retailers.
Why are we concerned? Home Depot experienced extraordinary growth through the pandemic period. Indeed, it was a result of the pandemic. So, homeowners took up projects that they had been putting off. They had nothing else to do. Now the consumer can get out and spend thier money on other things. Gee, they finished all their projects.
If we include last year’s decline, the average annual increase from prior pandemics to today is a robust 10+%. Even with the 2023 decline, revenue is up over 50% from 2018.
This kind of reaction by Wall Street, the media, and even a company highlights a lack of understanding of the real dynamics of the marketplace. Growth is not infinite. Consumers’ discretionary funds are finite.
Right, the pandemic clearly impacted different industries, well, differently. Your explanation hits the nail on the head.
If home sales are still below expectations, then Home Depot should hit the home improvement market harder. Can’t sell your home right now? Improve it! In theory, then it’s in better shape when the market rebounds.
Sometimes businesses take a hit for macro reasons and sometimes it’s a function of micro reasons. For Home Depot it seems to be macro reasons. Interest rates and consumer debt are not their friends right now. And maybe some home improvement projects were pulled forward during the pandemic. I don’t read about, and I do not notice myself any blunders they have made. They are on the downward slope of a mini boom. No need for any rash decisions. Keep inventories tight until interest rates and debt levels are in friendlier territory.
Agreed, Jeff. It’s a very well run business. Compared to 2019, annual sales remain up by 38.5% or $42 billion. That’s not exactly a disaster. They just have to sit out this slight ebbing of the tide.
Anecdotal evidence that the sluggish housing market (high interest rates, low inventory, people with cheap mortgages unwilling to move) is affecting HD sales in a negative way:
My daughter and son-in-law were frozen out of the housing market in Columbus, Ohio for just those reasons, until a job transfer took them to suburban Chicago. Once they found a suitable house, they spent some money on remodeling, fresh paint and new appliances. Where did they do most of their spending? Home Depot.
A small sample size, to be sure, but indicative of the impact the stagnant housing market is having on home improvement retailers like Home Depot — and the opportunity for gains in 2024.
A small sample, but it is exactly right. Movers spend more on home improvement than average. If housing transitions are down then it dampens demand.
With regards to Home Depot, aren’t we discussing the home improvement market? With housing in general in a interest rate induced funk, I believe the incentive to improve/upgrade/fix the existing homes we live in will continue.
Stay tuned.
Interest rates (even though they have come down a little) are still high. The same goes for inflation. That alone causes consumers to tighten up. That said, the pandemic was great for the home improvement industry. HD (and competitors) enjoyed growth. Are we back to normal? We probably don’t know what that means anymore, but I can share that consumers have learned to enjoy their homes and will find ways to enjoy them more. This should do well for HD. Find ways to showcase “home enjoyment,” not just “home improvement,” and that may lead to higher sales in the home improvement space.
Fortunately, economists predict the U.S. will avoid a recession this year, which would help the home category. Compared to 2020-2022, there is more labor available now to help consumers who have waited to undertake home improvement projects.
Yet growth may remain modest, as consumers feel squeezed by inflation, high interest rates, credit card debt, student loan repayments and dwindling pandemic savings. As consumers return to the office, revitalizing their home to accommodate personal and professional needs may now rank as a lower priority.
Home improvement and home goods retailers can ride out economic uncertainty by staying engaged with their customers, providing exceptional service, and adjusting their focus as necessary to best meet their customers’ needs. As customers continue to tighten their belts, they are going to think twice on if they really need to take on a project or make a purchase that could potentially be delayed. According to the J.D. Power Home Improvement Retailer Satisfaction Study, the in-store experience will have the largest impact on how satisfied the customer is with a retailer and will have a direct impact on how likely they are to continue using that retailer as their primary home improvement retailer as well as spending a greater share of their wallet with that retailer. Retailers have an opportunity to differentiate themselves through how they service their customers; making their shopping experience as painless as possible and helping to ensure their customers complete their projects successfully.