The tense environment in the housing market is starting to have a domino effect. High interest rates and a shortage of affordable housing is leading to little movement in home-buying and lower demand in home improvement projects, and the latest casualty of that domino effect is home improvement store Home Depot.
Home Depot has revealed that its sales have taken a hit during the fourth quarter of 2023. It earned $34.8 billion in sales which is a 2.9% decrease from the same quarter in 2022. Also, in the U.S. specifically, comparable sales decreased by 4%.
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The home improvement store also faced a significant blow to its net earnings. During the last few months of 2023, it earned $2.8 billion, or $2.82 per diluted share. This is a decline compared to the $3.4 billion, or $3.30 per diluted share, in net earnings it earned during the same time period in 2022.
During a recent earnings call, Home Depot Executive Vice President of Merchandising Billy Bastek attributed the decline in sales to decreased prices and customers softening their spending as they avoid tackling large home improvement projects.
“Our sales were largely in line with our expectations, however we did have some unfavorable impacts from weather in January and core commodity deflation,” said Bastek. “We saw a continuation of a trend that we have been observing throughout the year, with softness in certain big ticket, discretionary type purchases. Our customers continue to take on smaller projects, while still deferring larger projects.”
Home Depot CEO Ted Decker also claimed during the earnings call that “home turnover is a base of home improvement demand” and that there is a “lag effect” when it comes to resolving the issue of people not being able to afford moving into new homes, which can impact sales.
“That lag effect is a bit longer this time because of the interest rate environment and people are just being conservative of when they kick off a larger home improvement project in a home that they're going to ultimately stay in for a longer period of time,” said Decker.
Home Depot also indicated in the earnings call that it believes that higher interest rates in the housing market “will likely” continue to impact demand for larger projects in 2024.
The housing market has so far this year continued to face high mortgage interest rates and pushback from consumers after reaching poor home affordability levels last year that haven’t been seen since the 1980s. Just last week, mortgage rates reached above 7% while mortgage applications decreased by 10.6%, according to a weekly survey from the Mortgage Bankers Association.
"Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near term rate cut,” said Mortgage Bankers Association Senior Vice President Mike Fratantoni in the press release. “Mortgage applications dropped as a result with a larger decline in refinance applications. Potential homebuyers are quite sensitive to these rate changes, as affordability is strained with both higher rates and higher home values in this supply-constrained market."
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