It’s a challenging time to be a home improvement retailer.
While consumer spending is down in part because many American families are running out of money, the homeowners who make up most of the customer base for the segment are doing reasonably well financially.
“The consumer remains engaged — our consumer in particular remains quite healthy,” Home Depot CEO Ted Decker said Tuesday on the company’s second quarter earnings call.
Decker said home values had increased by 50% over the past four years, leaving owners with some $13 trillion of additional wealth in the form of equity.
The problem now for Home Depot and its peers is that customers are reluctant (or unable) to spend money on large purchases or projects, and the two biggest reasons for this have one thing in common: high interest rates.
For starters, high interest rates have led to a sharp slowdown in the housing market, which means fewer people moving into new places and fixing them up — traditionally a major source of sales for Home Depot.
Those rates also make it more expensive for homeowners who are staying put to borrow against the value of their home to pay for a project — arguably an even bigger source of big-ticket spending.
“The amount of folks who are in mortgages as low as 3% — plenty of mortgages under 5% — there’s definitely a little bit of a golden handcuff dynamic going on with those rates,” Decker said.
In either case, people might want to spend a lot of money at Home Depot, they just aren’t in a position to spend it right now.
On top of that, a lot of homeowners are still enjoying the appliances and home improvement projects they paid for only a few years ago during the pandemic that led to eye-popping sales results for Home Depot and Lowes.
As CFO Richard McPhail told Bloomberg, “it’s simply a story of a deferral mindset among our customers who have the means to spend.”
While there’s no telling precisely when spending will pick back up, it seems almost inevitable that it will have to.
Even if interest rates are slow to come down, Decker said life goes on and people need places to live: families grow, people find new jobs, others retire.
And when life happens, Decker says Home Depot will be ready.
