The US housing market has been hot this summer. Both purchases of previously-owned homes and residential housing starts reached their highest monthly levels in the month of July since 2007.
The improved demand has been driven by a resilient labor market, historically-low mortgage rates and “pent-up” demand from the Great Recession. Purchases of previously-owned homes advanced 2% sequentially in July to an annualized rate of 5.59 million houses, handily beating consensus estimates of 5.43 million. The increased levels of demand come despite limited support from first-time buyers, however. Millennials, now coming of age, are making their first “rent-versus-buy” decisions, and many, having witnessed the housing bubble burst late last decade, aren’t viewing ownership as the wise investment decision that their parents came to know.
Nevertheless, housing demand remains elevated, while supply has been somewhat constrained. The number of previously-owned homes on the market in July fell slightly to 2.24 million, the lowest number in the month of July since 2002, and it appears the previously-owned housing market has become a tight one, absent conditions of shadow inventory. Buyers willing to dive in coupled with increases in value-added home improvements has helped the median price of existing homes climb 5.6% in the month of July from the year-ago period. According to the most recent release of the Case-Shiller Price Index, home-price values have advanced nearly 35% since February 2012, which marked the housing price bottom following the Great Recession.
A few trends are helping to drive the home-improvement market to new heights. For one, a significant amount of remodeling takes place near the time of sale of a house, whether it be remodeling to increase property value prior to sale, or remodeling to turn a newly-acquired house into the home the buyer truly desires. In the years following the Great Recession, homeowners also put off major housing projects, getting by on the minimum home maintenance requirements. But after years of improving macroeconomic trends, homeowners are now ramping up the number of home additions and remodels. US home remodeling and repair spending is expected to hit $325 million in 2015 for the first time since 2007, a reflection of the realization of pent-up demand from the Financial Crisis.
Home Depot (HD) reported sales of $24.8 billion in the second quarter of its fiscal 2015, an increase of 4.3%, and net earnings per diluted share of $1.73, growth of nearly 14%. These strong results were driven by comparable US store sales growth of 5.7%. The company is experiencing significant momentum in its Do-It-Yourself (DIY) and professional categories, reflecting the nationwide trends in housing and home improvement. It also agreed to acquire maintenance, repair, and operations distributor Interline Brands in the quarter, in an attempt to better serve customers from project beginning to end, increasing revenue potential from customer projects.
Home Depot is also capitalizing on the increase of home improvement as a leisure activity for women. A recent survey shows that more and more women prefer to spend their down-time working on a home improvement project than shopping in a mall or cooking and baking, but “53% of women say lack of knowledge and skills prevents them from doing more home improvement projects.” So where do they turn for expert advice? The second most popular answer–after their fathers–was home improvement stores. “The most popular projects for women are painting, gardening, landscaping and wallpapering.” Home Depot offers weekly DIY clinics, where customers can get free hands-on advice from home improvement experts.
Lowe’s (LOW) has also done well capturing the consumer spending trends. The company reported sales growth of 4.5% to $17.3 billion in its fiscal second quarter, and diluted earnings per share advancing more than 15% to $1.20. Comparable store sales growth of 4.3% provided the underlying support for the solid quarterly results. The firm reported solid performance in several areas that support the trend of customers’ desire to invest in their homes, such as kitchens, outdoor power equipment, and seasonal living, and the recent launch of HGTV HOME by Sherwin-Williams (SHW) is expected to capture the appeal of DIY-paint customers.
Lowe’s is also taking note of the increased number of consumers that start their shopping process online, taking measures to improve the consumer’s online shopping experience. It has re-launched lowesforpros.com as part of its broader commitment to build upon its strong foundation with its professional customers. The firm is focused on strengthening its portfolio of professional-targeted brands, and is experiencing strong momentum in its account executive pro services, which facilitates the ordering process for professionals. Lowe’s is looking to take advantage of the continued heightened levels of home remodeling through improved relationships with its professional customers.
No matter how much we’re fans of the strong home-improvement trends, however, the equity of Home Depot and Lowe’s continue to trade at lofty levels. It is our contention that shares of both companies, fair or not, will ebb and flow with discretionary and cyclical home-improvement trends. We believe that there will be a better time again to consider both companies, much like there has been in previous housing cycles.
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