Long-awaited turnarounds coming for Home Depot, Lowe's after Fed rate cut
The light at the end of the tunnel is coming for the home improvement sector.
A soft housing market has weighed on retailers like Lowe's (LOW) and Home Depot (HD) over the past couple of years, but a turnaround is within sight after the Fed finally enacted a large rate cut last month.
“Now that interest rates are lower, we will definitely, first and foremost, see more demand for housing,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance.
For the past few years, homeowners and buyers squeezed by rising housing prices and interest rates have put off potential moves and renovations. Existing home sales fell to a 10-month low in August, data from the National Association of Realtors showed.
During Home Depot's Q2 earnings call, CEO Ted Decker blamed "higher interest rates and greater macroeconomic uncertainty" for "weaker spend across home improvement projects." Its same-store sales declined by 3.3%, marking its seventh straight quarter of negative sales growth.
Lowe's CEO Marvin Ellison said on the company's Q2 earnings call that "elevated interest rates and inflation" have caused DIY customers to remain "on the sidelines waiting for some form of an inflection to take place." The company reported a same-store sales decline of 5.1% and cut its 2024 full-year guidance.
Now, the expectation of easing interest rates is breathing new life into the market. Mortgage rates have dropped more than a percentage point since May, reaching the lowest level in two years.
Lower rates could “help ease the mortgage rate lock-in effect and unleash some supply,” Charles Dougherty, senior economist at Wells Fargo, told Yahoo Finance. The so-called lock-in effect refers to ultra-cheap mortgages secured when interest rates were low, keeping a lid on sales activity.
Wells Fargo estimates total existing home sales to reach a 4.13 million annualized rate at the end of this year and 4.37 million in 2025. (During the pandemic housing boom, total existing home sales hit a 6.12 million annualized rate.)
Floor & Decor (FND), Lowe's, and Home Depot could see a boost in business. Home Depot's stock is up 11% in September, while Lowe's and Floor & Decor picked up 10% and 15% gains, respectively. Due to the "potential pent-up demand for existing and new home sales," home improvement stocks "might benefit more" compared to past rate cuts, per Bank of America analyst Robert Ohmes.
"If we get a big pick-up in existing home sales, that should be a really good tailwind ... In the short-term Floor & Decor [benefits] the most because people tend to do floors before and after they sell the house," he told Yahoo Finance over the phone.
The average household's spending on flooring jumps 160% in the six months preceding a move.
However, investors shouldn't count on seeing better earnings reports immediately. "The Fed lowering rates should cement an inflection point,” Dougherty said, but "a full-fledged rebound is still kind of off in the distance.”
Consumers have to apply for lower mortgages, while others may wait for the Fed to cut rates further, Ohmes pointed out. The wait could result in a temporary drag on short-term demand.
Stifel analyst Andrew Carter, who has a Buy rating on Floor & Decor and Hold on Lowe's and Home Depot, expects the latter two to continue to provide softer same-store sales guidance. Sales growth will likely be flat to slightly up in 2025, he said.
"You haven't seen any real massive inflection point to say ... you're really confident in demand coming back," Carter told Yahoo Finance.
Easing rates would also bode well for the new-home market. Builders have been stepping up over the past few years to fill the gap by offering more appealing incentives for newly constructed homes.
Taylor Morrison (TMHC) CEO Sheryl Palmer told Yahoo Finance that the homebuilder plans to increase the number of newly built homes by 10% on an annual basis and expects to close 12,600 to 12,800 homes by year-end.
"You can already see the growth that we've seen this year,” Palmer said. “That's a combination of consumer demand as well as our ability to build faster.”
Palmer explained that the cost of building a home remains flat as “labor has probably been the stickier component," and "on a macro level, as [housing] starts come down, it does give us greater negotiating [power]."
While Lowe's has traditionally had a larger DIY consumer base than Home Depot, both have been investing in their pro businesses. The latter closed its $18.25 billion acquisition of SRS Distribution, a distributor for residential professional customers, this June.
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.