More room for improvement
Higher mortgage rates and steadily rising prices have pumped the brakes on the U.S. housing market in recent months.
The trend has stirred concerns among some investors that home improvement spending could also slow, dimming the earnings prospects for Home Depot and Lowe’s.
A report last month by Harvard University’s Joint Center for Housing Studies projected that annual spending growth on home-improvement and repair will fall next year, from
7.5 percent last quarter to
6.6 percent in the third quarter of 2019.
While the trend isn’t favorable for either company, investors shouldn’t overestimate the impact, says Robin Diedrich, senior analyst at Edward Jones.
Around 75 to 80 percent of the retailers’ business comes from remodeling that isn’t tied to home sales, according to Diedrich’s estimates. Existing homeowners, many having locked in ultra-low mortgage rates, have more incentive to invest in upgrading their homes.
“The bigger risk long-term is if interest rates rise enough to slow down the economy in general,” Diedrich says. “On a relative basis, the homeimprovement space looks to us as a place to invest.”