Home improvement boom is forecast to fizzle

October 25, 2019 in News by RBN Staff

Ryan Dezember   4 hrs ago
Home-improvement retailers have proven a bright spot during an otherwise underwhelming stretch for retail stocks, but a popular predictor of remodeling spending suggests tougher times ahead.

Renovation and maintenance spending are forecast to decline over the next year for the first time in a decade, according to the Leading Indicator of Remodeling Activity, which was developed by Harvard University’s Joint Center for Housing Studies. That could be a threat to highflying stocks like Home Depot Inc. and Sherwin-Williams Co., which have shot to record highs this week.

Following years of 5% to 7% growth in spending since last decade’s housing crash, Harvard’s model has been predicting slower growth for the past year or so and an outright decline next year for the first time since 2010.

“Seeing this slowdown and decline into next year is certainly worrisome for the economy,” said Abbe Will, associate project director for the Harvard’s Remodeling Futures Program. The index takes into account several economic indicators, including sales of existing homes, housing starts, residential remodeling permits and building-material sales compiled by the U.S. Census Bureau.

Besides keeping the cash registers busy at hardware stores and lumber yards, remodeling activity is a good barometer of the housing market and consumer confidence. Home sellers usually spend to spruce up their houses before listing them, while buyers often renovate purchases. Homeowners staying put tend to embark on remodeling jobs when property values are rising because they are more likely to be able to borrow against the equity in their homes to pay for the work.

Lately, home prices have been on the rise, which has helped offset the effects of low borrowing costs and put pressure on the sales market. The National Association of Realtors said this week that sales of previously owned homes fell 2.2% in September from the previous month.

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Home-improvement retailers’ stock performance hasn’t suggested any looming cutback among customers. Shares of Home Depot and Sherwin-Williams are up 32% and 46%, respectively, this year, and trading at highs. Shares of Lowe’s Cos. are about 6% off their high-water mark set in April, but still up 20% in 2019. The SPDR S&P Retail ETF, which tracks the shares of 85 retailers, is up 7.1% over the same period.

Sherwin-Williams said Tuesday that third-quarter same-store sales in the U.S. and Canada rose 8.1% year-over-year and it still planned add between 80 and 100 new stores this year even though it had opened only 31 through the previous three quarters.


The Cleveland company sells paint in its own 4,700-odd stores and those of others, such as Lowe’s, and to big home builders.

“We ended the quarter with our customers continuing to be very optimistic, reporting solid backlogs for the remainder of the year and a strong sense of confidence heading into 2020,” Chief Executive John Morikis said.

Executives said that Harvard’s forecast didn’t worry them much, contending that it is driven by big-ticket spending.

“Some of the smaller projects like a painting of your kitchen or a painting of a bathroom, those tend to hold up maybe a little bit better in an environment like that.” said Jim Jaye, Sherwin-Williams’ head of investor relations.

Though the Harvard index, known as the LIRA, predicts annualized spending to decline just 0.3% by spring, the historical average is roughly 5% annual growth.

“We have some reason to believe this may be a turning point in the cycle for home remodeling, but it could be a hiccup,” Ms. Will said. Interest rates will have a lot to do in determining whether it is the former or the latter, she said. Low borrowing costs “could help keep the market chugging along for a little more and maybe these declines won’t turn into a negative.”

A sharp rise last week in the average 30-year fixed-mortgage rates, to 4.02% from 3.92%, led to a roughly 12% decline in mortgage applications and a 17% drop in refinance applications, according to the Mortgage Bankers Association. A week earlier, when borrowing costs were lower, refinance applications rose 4%.

Alex Pettee, director of research at Hoya Capital Real Estate LLC, said he remains bullish on home-improvement stocks because the LIRA index “doesn’t respond particularly well to the rapid changes in sentiment and mortgage rates that we’ve seen over the past year.”

Lowe’s and Home Depot are the two biggest holdings in his firm’s Hoya Capital Housing ETF, which also includes Sherwin-Williams, several home builders, furniture makers, lenders and timber concerns. The exchange-traded fund is up 18% since launching in March.

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