Home Depot’s revenue is so large, at $157 billion, that their earnings report has become a highly reliable summary of housing market conditions. Home Depot reported 4Q earnings last week, and we picked up seven important lessons on the state of demand for building materials and construction costs. You’ll find those listed below—plus key background facts from JBREC’s own bottom-up surveys and analysis.
Home Depot has ~17% of a $900 billion market as of February 2022.
(Note: Every quarter, we summarize 32 public building products companies’ earnings and financial results across 19 product categories for research clients. Learn more about JBREC’s building products research package.)
Lesson #1: Consumer demand for home improvement peaked in mid-2022.
We began picking up on softness in remodeling and home improvement in our professional remodeling survey around 3Q22, when interest rates skyrocketed. Now, we’re seeing clear weakness in the professional remodeling sales funnel. This points to an even further slowdown ahead in remodeling and home improvement.
Lesson #2: Volumes of purchases have returned to 2019 levels.
his is consistent with a clear drop-off in the early leading indicators of consumer interest in remodeling. Google search volume for “kitchen remodel” and “bathroom remodel” are back to pre-pandemic levels.
The obvious question not yet answered is: will volumes stabilize at 2019 levels or fall through the floor? (Fill out a contact form for JBREC forecasts for residential repair and remodeling, including spending and volume, if you are interested.)
Lesson #3: Consumer price sensitivity is back.
Price sensitivity is not just driving down volumes. Remodelers tell us their clients are increasingly trading down in terms of product grade and project options to stay on budget.
Lesson #4: Homeowners are downsizing “nice-to-have” home improvements.
Discretionary (nice-to-have) home improvement spending is very much linked to the health of the economy and even concerns about the health of the economy. When the economy slows, homeowners hit pause on big remodeling projects.
In contrast, home improvement spending on “cannot-wait” products holds up much better during recessions. (Would you wait for interest rates to fall to fix a leaky roof? Or a busted water heater?)
Lesson #5: The Pro segment is still stronger than DIY.
This is slightly better than what independent building materials dealers have been reporting in our monthly Building Products Dealer Survey. DIY customer traffic has been very weak through most of last year, following the 2020 boom. Pro traffic has been noticeably softening since June, which Home Depot noted was the turning point in home improvement demand (see lesson learned #1 above). The Pro segment is also benefitting from elevated project backlogs.
Lesson #6: Competition for labor is fierce. Wages are still going up (by $1 billion).
Competition for workers continues to push up wages across the economy, including lower-skilled laborers. Companies’ wage costs, measured by the Employment Cost Index, are up more than +5% YOY, the fastest rate in 20+ years and roughly double the pace consistent with the Fed’s 2% inflation target.
The Fed needs to cool off wage growth to meet its inflation target goals. And builders and contractors need relief to bring their costs down as well.
Lesson #7: Remodeling’s historical relationships to home sales and home prices have broken down.
The sale of a home drives some home improvement activity, but Home Depot hasn’t noticed slower demand despite fewer transactions. We think other drivers must be offsetting the decline in home purchases, such as continued remodeling due in part to the mortgage-rate “lock-in” effect and record-high home equity. As a result of these unique drivers, homeowners are strongly incentivized to stay put and remodel, rather than move.
On the topic of home prices, the average homeowner sits on a $348,000 cushion of home equity, an all-time high. This means declines in home values won’t have the same negative impact on remodeling activity as in the past, since most homeowners will remain very wealthy.
Recap: 7 lessons from the Home Depot earnings call:
- Consumer demand for home improvement peaked mid-2022.
- Volumes of purchases have returned to 2019 levels.
- Consumer price sensitivity is back, driving demand toward lower prices.
- Homeowners are doing fewer “nice-to-have” home improvements.
- The Pro segment is still stronger than DIY.
- Competition for labor is still fierce. Wages are going up by $1 billion at Home Depot alone.
- Falling home sales and declining home prices don’t seem to be impacting material demand, likely due to mortgage-rate lock-in and tremendous home equity.
A modified version of this article appeared first as a thread on Eric Finnigan’s Twitter page.