Pending home sales and housing starts are down. Meanwhile, mortgage rates hover above 6.5%.
Housing starts dropped in July, down 13.5% year-over-year, according to a new report from the Census Bureau.
The decline suggests the home improvement sector is also looking sour. Case in point: Home Depot reported OK earnings on Tuesday, but said it’s worried about the “frozen” housing market.
Home Depot has been consistently outperforming its own corporate guidance for a long time, but not exactly because the retailer is thriving. Instead, the company has been intentionally setting its expectations low.
“There must be some lumpiness that exists out there in demand that isn’t giving leaders confidence,” said Jaime Katz, an equity analyst at Morningstar.
Pending home sales are down. Housing starts are down. Meanwhile, mortgage rates are up and seem kinda stuck there. The average rate on a 30-year fixed is 6.67%
“It’s been sort of a sideways struggle,” Katz said.
That sideways struggle isn’t just about the people who can’t afford to buy. It’s also about the people who can’t afford to sell.
“A lot of people still have mortgages that are, you know, below 3% in rates,” said David Zhang, a finance professor at Rice University.
Twenty percent of mortgages sit below an interest rate of 3%. Half of all mortgages sit below 4%. And sure, eventually people will give up those rates. They’ll change jobs, they’ll divorce, they’ll have kids.
“I think in the long run these things will all resolve itself. In the next year, yeah, it seems tough to see,” Zhang said.
Home Depot seems to agree. So it’s investing more in Home Depot Pro to capture more business from contractors and investing more in its services for DIYers. It’s also launching express delivery in three hours or less.
“Right now the majority of the industry is being driven by repair work,” said Brad Thomas, a retail analyst at KeyBanc Capital Markets.
People sitting on those low mortgage rates are spending on renovations, which Home Depot said is the kind of business keeping the company performance OK.
“They do believe over the long run that the housing market is a good place to be,” Thomas said.
They kind of have to. Their business depends on it.
