Homeowners are still holding off on renovations until interest rates come down.
This insight comes from consumer behavior data shared by Home Depot Inc. HD executives during their most recent earnings call.
A drop in sales from furniture retailer Wayfair Inc W falls in line with these data while the bankruptcy of LL Flooring LL shows that the slowdown has been too heavy for some businesses to bear.
What Home Depot Is Saying: The real estate market was one of the sectors hit hardest by rising interest rates.
While the prospect of an interest rate cut in September has brought some homebuyers back into the market, more than two years of high interest rates continue to burden homeowners looking to renovate their properties.
In recent weeks, lowering mortgage rates have led to a skyrocketing pattern in mortgage applications. This week saw the lowest 30- and 15-year mortgage rates in over one year, taking applications up by 16.8% on a weekly basis. Refinancing activity also hit the highest level since May 2022.
Yet the home improvement sector is still being affected. In its most recent earnings call, Home Depot executives highlighted the level at which people are still putting off renovation projects.
"During the [second] quarter, higher interest rates and greater macro-economic uncertainty pressured consumer demand more broadly resulting in weaker spend across home improvement projects." said President and CEO Ted Decker on the company's Tuesday call.
Missing analyst estimates on revenue caused Home Depot’s stock to drop slightly on Tuesday. The company quickly recovered on Wednesday and is now up by 5% in the last five trading days.
Rising expectations for an imminent drop in interest rates has caused many Home Depot customers to defer renovation projects to a near future with —presumably— lower interest rates.
"Everyone’s expecting rates are going to fall, so were deferring those projects," said Decker.
"There’s just a lot of noise with political and geopolitical environment, unemployment ticked up, inflation keeps eating away at disposable income, and I think people just took a pause as we’ve progressed through the quarter – or more of a pause because of these macro uncertainties," he added.
Larger projects, like kitchen, bath, flooring, lighting renovations "are all under pressure" said CFO Richard McPhail in the call. Yet, he added that there is "a direct relationship between decreases in mortgage rates and the amount of activity that you at least see picking up in turnover."
A fresh consumer price index report from Wednesday put inflation for July at 2.9% year-over-year, adding hopes for an interest rate cut in September. Analysts are expecting moderation from the Fed, with a 0.25% cut more likely than 0.5%.
LL Flooring Files For Bankruptcy: While there's light at the end of the tunnel for the real estate and home improvement sector, other companies have not been able to sustain the blow of 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 stock. The company will close 94 of its almost 400 U.S. stores and said it is looking for buyers to take over its business.
LL said in a press release that several "macroeconomic and operational challenges" have put a strain on its business.
The most obvious culprit behind LL's financial troubles are high mortgage rates. But low lumber prices might also have affected the company's bottom line. Lumber has come down from a May 2021 peak of $1500 per 1000-feet board, to around $520 in August of this year, according to Trading Economics.
An upcoming earnings report by Walmart Inc WMT on Thursday could shed more light into the state of spending by Americans.
Americans have been spending less on their homes when it comes to interior decoration and furniture, according to the most recent earnings report from "all things home" retailer Wayfair.
Several analysts dropped their price targets for the company after its quarterly report fell short of expectations amid cautious consumer spending and a challenging market.
CEO Niraj Shah compared the slowdown in home goods sales to the great financial crisis of 2008, saying that "customers remain cautious in their spending on the home."
CFO Kate Gulliver said in a CNBC interview that while the country is not technically in a recession, the company is seeing a "recession-like correction" in the home goods category, something which Shah called "unprecedented."
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