Monthly Updates: Home Improvement Sector

As we enter November and gear up for the quarterly result announcements for both Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW), we take a look at the months events for America’s two largest home improvement retailers. Both stocks have had a similar growth trajectory, growing by around 7% in the last month, while the overall S&P 500 Index rose only 2.5%. Falling unemployment rates, rising builders’ confidence and an increasing number of housing starts- all bode well for the U.S. housing industry in the near term. In turn, this trend should benefit the home improvement industry, which depends on consumers who look to buy home improvement goods and services to furbish their newly bought/rented homes.

However, the impact of the data breach at Home Depot last month could have deterred consumers from using their credit/debit cards to make payments, and although the company’s stock has remained strong, a possible decline in sales this quarter could soon catch up with Home Depot’s share price as well. But despite the possible loss in consumer confidence, home improvement sales could benefit from the expected overall surge in demand due to improving macro conditions in the U.S. We look at recent trends that could have bolstered growth in both Home Depot’s and Lowe’s sales in the last month.

We have a Trefis price estimate of $92.65 for Home Depot’s stock, which is roughly 5% below the current market price.

Our complete analysis for Home Depot’s stock

Accelerating New And Existing Home Sales:

Home improvement retailers are impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Following the first quarter, house sales have picked up in the U.S., with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.17 million last month, the highest sales figure since seen in September last year, and also higher than the overall adjusted figure of 5.07 million for 2013. ^[1] New home sales also rose to a SAAR of 467,000 last month, highest in over a year. Increases in new and existing house purchases in the last two months could have boosted sales of home improvement equipment in October.

We have a $52.30 Trefis price estimate for Lowe’s stock, which is roughly 8% below the current market price.

See our complete analysis of Lowe’s here

Improving Employment Rates And Spending:

Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively. ^[2] In particular, the recent job growth, that saw the unemployment rate drop to below 6% in September, fueled a rise in consumer spending by 1.8% in Q3. ^[3] This growth can act as a reference, reflecting how home improvement sales might also have grown in line with increases in employment rates and consumer spending.

Mortgage Rates Remain Low As Of Now:

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage climbed to 3.98% this week from 3.92% last week. Even though the mortgage rate is up, it has remained below 4% in the last three weeks, and lower than last year’s levels. ^[4] Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates are expected to rise going forward, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. ^[5] The rates haven’t risen as aggressively as they did mid-last year when the Fed first announced reduction in bond purchases. However, the average rate for a 30-year fixed-rate mortgage is expected to rise to 5.1% by the end of 2015, which could further prompt house purchases in the near term, consequently boosting home improvement sales.

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1. “New and existing home sales, U.S.“, National Association of Home Builders [↩]
2. U.S. GDP growth rate [↩]
3. U.S. unemployment data [↩]
4. 30-year fixed-rate mortgages since 1971 [↩]
5. historical 30-year fixed-rate [↩]