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Increase in home equity levels may boost demand for these two stocks

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As Home Depot Chief Financial Officer Richard McPhail mentioned in a recent earnings call, higher interest rates are causing customers to delay big projects, waiting for interest rate cuts before diving into home improvements. Lowe’s CEO Marvin Ellison also noted that shoppers are avoiding larger projects that require contractors due to uncertainty around interest rates and inflation. Both companies are experiencing a decline in sales for larger tickets, with customers opting for smaller do-it-yourself projects instead.

While the market anticipates interest rate cuts in the future, for now, both Home Depot and Lowe’s stocks are underperforming. Analysts are predicting limited upside in the near term due to valuation and interest rate dynamics. However, once interest rates drop and consumers start tackling deferred projects, there may be an opportunity for growth in the long run.

Currently, homeowners are more likely to focus on necessary repairs rather than discretionary projects due to elevated interest rates. However, high levels of home equity could encourage homeowners to take on larger projects once rates decrease. Analysts are holding a positive outlook for both Home Depot and Lowe’s, expecting a robust recovery when interest rates move lower.

Professionals remain an important segment for both retailers, with Home Depot leading in this category. Lowe’s has been working to gain market share among professionals, which showed positive results in the first quarter. Home Depot’s planned acquisition of specialty distributor SRS indicates a focus on the professional segment, aiming to capture a larger portion of the $250 billion market.

Overall, while the current environment of high interest rates is causing customers to delay major projects, there is potential for growth in the long term once interest rates begin to decline. Homeowners with high equity levels and pent-up demand may drive an increase in home improvement projects, benefiting both Home Depot and Lowe’s. Despite short-term challenges, analysts are optimistic about the medium to long-term outlook for the industry.

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