Home Depot Sales Plummet Amid Housing Market Woes

home depot sales plummet amid housing market woes.jpg Business

Americans’ Pessimism about the Housing Market Weighs on Home Depot

Home Depot, one of the largest home improvement retailers in the United States, is facing a challenging period as Americans become increasingly pessimistic about the housing market. After three consecutive years of sales growth, Home Depot experienced a decline in sales in the first quarter of this year, and further declines are expected in the second quarter. The main factor behind this downturn is Americans’ negative sentiment towards housing.

According to Fannie Mae’s Home Purchase Sentiment Index for July, only 18% of Americans believe it is a good time to buy a home, matching an all-time low. The challenging housing conditions are primarily attributed to high home prices and unfavorable mortgage rates. Although median home prices dropped slightly year over year in July, they remained close to record highs. Additionally, the average interest rate for a 30-year fixed-rate mortgage has been above 6.5%, nearing 7%, since the end of May.

Doug Duncan, Fannie Mae’s senior vice president and chief economist, explains that the expectation of rising home prices adds to the perception of unaffordability. This sentiment is reinforced by the lack of movement in the "good time to sell" component, indicating that the low inventory of existing homes for sale is likely to persist in the near term. As a result, many homeowners are choosing to stay put rather than upgrading to a new home.

Slowing Home Improvement Market

One might assume that this would be a favorable time for Home Depot, as homeowners who are unable to move to a new home may opt to make improvements on their current property. However, Americans seem to be scaling back on renovation projects. The US home improvement market, estimated to be worth around $1 trillion, saw significant growth during the pandemic due to a combination of increased home buying and the need for improved living spaces. However, Bank of America analysts predict a pause in spending growth as homeowners anticipate softening home prices, slower wage growth, and a potential recession.

Home improvement spending, which experienced a peak in year-over-year growth in mid-2021, has been decelerating and turned lower year over year in early 2023. Although some factors may become more favorable in the second half of 2023, analysts expect the full year to end up flat. This trend is expected to continue into 2024, with occasional bumps along the way. Furthermore, fewer existing home sales, down about 20% from a year ago, are also impacting the home renovations industry. With fewer existing homes changing hands, there is less demand for the home improvements typically made when moving into a new home.

Favorable Trends for Home Improvement

Despite the current challenges, there are some favorable long-term trends for the home improvement industry. The large cohort of Millennials, whose average age of first-time homeownership is 36, continues to buy homes. This demographic, combined with the shift to rural and suburban areas, supports spending on home-related goods. Bank of America analysts note that more than three-quarters of Millennials express a preference for living in suburban or rural areas, which aligns with the concentration of home improvement retail chains like Home Depot.

In the first quarter, Home Depot reported a decline in sales of 4.5% at stores open for at least a year and a 6.4% decrease in income compared to the same period last year. The company’s total revenue for the first quarter also slipped by 4.2% to $37.3 billion compared to the first quarter of 2022.

While Home Depot faces short-term challenges due to the negative sentiment in the housing market, the long-term trends of Millennials entering homeownership and the shift to suburban and rural areas bode well for the home improvement industry. These factors present opportunities for retailers like Home Depot to capitalize on the demand for home-related goods and services in the coming years.

Takeaways

  1. Americans’ pessimism about the housing market, driven by high home prices and unfavorable mortgage rates, is impacting Home Depot’s sales and profit.
  2. The home improvement market, which experienced significant growth during the pandemic, is now slowing down due to various factors, including softening home prices and slower wage growth.
  3. The shift to rural and suburban areas and the continued buying activity of Millennials present favorable long-term trends for the home improvement industry.
  4. Despite short-term challenges, Home Depot and other home improvement retailers can capitalize on the demand for home-related goods and services in the coming years.

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