How Home Depot Will Gain From The Low Inventory Of Homes For Sale

by Trefis Team
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Home Depot (NYSE:HD) raised its guidance after reporting record sales for the second quarter. The company expects 6.3% year-over-year growth in revenue and 4.9% comparable sales growth this year. Much of this growth is fueled by booming home improvement spending.

It’s a cause-effect relationship. Low inventory of homes for sales has prompted home price appreciation and led to bidding wars, which in turn has prompted owners of houses to add value to their present homes through remodeling and repairs.

fredgraph

The months’ supply represents the ratio of houses for sale to houses sold. The declining months’ supply metric indicates that the current for sale inventory wouldn’t last as long as it has historically, given the current sales rate, if no additional new houses are built. This has boosted prices of homes, which are also rising due to the low mortgage rates and the gradual appreciation after the period of recession. In the first quarter of 2016 alone, homeowners collectively gained an additional $260 billion in home equity, owing to higher home values. [1] The low supply of homes has been a major factor in driving the home prices up. Low activity of construction companies has meant that there is a mismatch between demand and supply of homes.

As a result, home renovation has bounced back in a big way, more than new home construction, probably also as renovation can be done gradually, in phases. According to a report from Harvard’s Joint Center for Housing, home improvement and repair expenditures will grow by 8% by the start of next year, which is much larger than the historical average growth rate of 4.9%. Expense for repairs and remodeling is expected to cross $300 billion this year, surpassing the previous high of ~$285 billion in 2007, and grow further in 2017.

This will have a direct positive impact on Home Depot, which expects to cross $100 billion in annual sales by 2018, up from slightly less than $90 billion last year. The industry-leader in home improvement estimates the addressable domestic consumer market at approximately $180 billion, and growth could further come from the surge in repair, remodeling, and renovation activities. Home Depot has already had a stellar first half of the year, reporting the highest quarterly sales and net income in its history in Q2. The company also gained more market share from its competitor Lowe’s last quarter, as its 5.4% comparable growth beat the 1.9% comp growth for the latter. Home Depot has also performed better than the retailer Target, whose comps declined in Q2 due to its first customer traffic dip in two years. The surge in home improvement spending should bode well for Home Depot, and guide the company to its outlook of 6.3% top line growth for this fiscal year.

Have more questions on Home Depot? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Home Depot

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Notes:
  1. ‘Nesting is investing’ as home improvement spending set to hit $321 billion, cnbc.com []
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