Homeowners are still waiting to renovate until interest rates drop.
These insights come from consumer behavior data shared by Home Depot Inc. HD Executives during their last quarterly earnings conference call.
Sales decline at furniture retailer Wayfair Inc B is consistent with these data, while the bankruptcy of LL floor coverings LL shows that the economic slowdown was too severe for some companies.
What Home Depot says: The real estate market was one of the sectors most affected by rising interest rates.
While the prospect of a rate cut in September has brought some homebuyers back into the market, interest rates that have been high for over two years continue to pose a burden for homeowners looking to renovate their properties.
In recent weeks, falling mortgage rates have led to a rapid increase in mortgage applications. This week saw the lowest mortgage rates for 30- and 15-year terms in over a year, leading to a 16.8% weekly increase in applications. Refinance activity also reached its highest level since May 2022.
Still, the home improvement sector is still affected. In the recent earnings call, Home Depot executives emphasized how much people are still putting off renovation projects.
“In the (second) quarter, higher interest rates and greater macroeconomic uncertainty put pressure on consumer demand in general, resulting in lower spending on home improvement projects,” said the President and CEO Ted Decker during the company’s conference call on Tuesday.
Missing analyst estimates for sales led to a slight decline in Home Depot shares on Tuesday. However, the company quickly recovered on Wednesday and has now gained 5% over the last five trading days.
Rising expectations of an imminent decline in interest rates have caused many Home Depot customers to postpone renovation projects until a near future with – supposedly – lower interest rates.
“Everyone is expecting interest rates to fall and is therefore postponing these projects,” said Decker.
“There’s just a lot of noise around the political and geopolitical environment, unemployment is up, inflation continues to eat into disposable income and I think people just took a break during the quarter – or rather a pause due to these macroeconomic uncertainties,” he added.
Larger projects such as kitchen, bathroom, flooring and lighting renovations “are all under pressure,” said the CFO Richard McPhail in the conversation. However, he added that there is “a direct correlation between falling mortgage rates and the activity that you see at least as increasing sales.”
A new consumer price index report on Wednesday put inflation at 2.9% year-on-year for July, raising hopes for a rate cut in September. Analysts expect a dovish stance from the Fed, with a 0.25% cut more likely than a 0.5% cut.
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LL Flooring files for bankruptcy: While there is light at the end of the tunnel for the real estate and home improvement sectors, other companies have not been able to withstand high interest rates.
On Monday, home improvement retailer LL Flooring, also known as Lumber Liquidators, filed for Chapter 11 bankruptcy. The NYSE announced the delisting of its shares. The company will close 94 of its nearly 400 U.S. stores and announced it is looking for buyers to take over its business.
LL said in a press release that several “macroeconomic and operational challenges” had impacted the company’s business.
The most obvious reason for LL’s financial problems is high mortgage rates. But low lumber prices may also have impacted the company’s bottom line. According to Trading Economics, lumber prices have fallen from a high of $1,500 per 1,000-foot plank in May 2021 to around $520 in August of this year.
An upcoming earnings report from Walmart Inc WMT on Thursday could shed more light on Americans’ willingness to spend.
According to the latest earnings report from home retailer Wayfair, Americans are spending less on home decor and furniture.
Several analysts lowered their price targets on the company after the company’s quarterly report fell short of expectations amid subdued consumer spending and a difficult market.
Managing Director Niraj Shah compared the decline in home goods sales to the great financial crisis of 2008 and said that “customers remain cautious about their home spending.”
Chief Financial Officer Kate Gulliver said in a CNBC interview that while the country is not technically in a recession, the company is experiencing a “recession-like correction” in the home goods category, which Shah called “unprecedented.”
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