After three straight years of sales growth, Home Depot went into reverse in the first quarter, and sales and profit were down again in the second quarter of fiscal 2023, with reported sales of $42.9 billion, a decrease of 2.0% from the second quarter of fiscal 2022. Comparable sales for the second quarter of
fiscal 2023 decreased 2.0%, and comparable sales in the U.S. decreased 2.0%.
Experts say that ultra low interest rates are keeping people from selling, high home prices and higher mortgage rates keeping people from buying – suggests that a lot of people are hunkering down in their current home. One might expect this to be a good time for Home Depot – homeowners who aren’t able to move up to a home with the ‘dream kitchen’ might be making improvements on their own home. But Americans appear to be tapping the breaks on renovation projects.
As CNN reports, the US home improvement market is about $1 trillion, according to a July report on the home improvement industry from Bank of America Global Research, with Home Depot commanding 17% of market share, Lowe’s, by comparison, has 10%, in what remains a relatively fragmented industry.
Spending on home improvement during the pandemic – between 2020 and 2022 – grew at an outsized pace due to a combination of a home buying frenzy and people’s need for improved space as they stayed at home. Ample household balance sheets, plus price inflation in home improvement goods and services, boosted the industry.
“As we look ahead, we expect spending growth to pause as homeowners anticipate softening home prices, slowing wage growth, and a potential recession,” the Bank of America analysts wrote in the report.
Following a peak in year-over-year growth in mid-2021, home improvement spending has been decelerating and turned lower year over year in early 2023, according to Bank of America. While some factors become somewhat more favorable for home improvement spending in the second half of 2023, the analysts expect the full year to end up flat, and for this trajectory to continue into 2024 with some periodic bumps along the way.
Another hit on home renovations industry is fewer existing home sales, which are down about 20% from a year ago. Typically, for every new construction home sold in the last ten years, approximately nine existing homes changed hands, supporting renovation activity according to Bank of America. The home improvement market is not only larger than that of new home construction, but is considerably less volatile.
But now the share of new homes is rising and the share of existing homes is dropping. With fewer existing homes changing hands than in recent years as homeowners hunker down with their sweet low mortgage rate, there is less demand for the home improvements made when moving into a home.
Bank of America analysts suggested that some long term trends are favorable for the home improvement industry.
The average age of a first time buyer is 36 years old, according to the National Association of Realtors. The large cohort of Millennials are still buying homes, because of the phase of life they are in. Those demographics remain favorable for the home improvement industry.
Another favorable trend for home improvement is the continued move to rural and suburban areas, the analysts found. “The shift from urban apartment and townhomes to suburban and rural properties should support growth in spending on home-related goods,” the analysts wrote. Taken together the two trends are good news for home renovation retailers like Home Depot.
More than three quarters of Millennials expressed a preference for living in suburban or rural areas rather than urban areas, according to the Bank of America study. “For the large home improvement retail chains, which also concentrate their stores predominantly in suburban and rural markets, the migration of the US population out of dense urban areas with smaller homes into suburban and rural markets with larger homes is a beneficial trend.”
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