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Could Rising Home Prices Be Bad News For Home Depot And Lowe's?

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Could Rising Home Prices Be Bad News For Home Depot And Lowe's?
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Historically, home improvement retailers such as Home Depot Inc (NYSE: HD) and Lowe's Companies, Inc. (NYSE: LOW) do well when the housing market does well in terms of both volume and value of sales.

Good News, But Bad

Incidentally, an analyst suggested that the good news of home appreciation could be interpreted as bad news, as inflated asset prices trigger worries concerning a meltdown, keeping homebuyers off the market.

Bernstein said in a note, we are nearing such a scenario of higher home prices being construed as bad news for all the stakeholders involved in the housing market.

Record Home Prices Stir Worries

Analyst Brandon Fletcher noted , despite his earlier view that strong growth rate recently seen in the housing market would slow down over time, spending on housing continued to rise, as asset prices, in general, and home prices, in particular, were at or near all-time highs. Additionally, the analyst has sensed some nervousness creeping into conversations among the media and investors about housing prices.

Bernstein said the current perception is that prices may be too high. The firm quoted a recent Federal National Mortgage Association (OTC: FNMA) survey, which suggested that more consumers now feel that it's better to sell a home than to buy a home.

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Prices Could Be Moderating

Moreover, the firm noted that a recent data showed a 2-percent drop in the median size of a new single-family home in 2016, the first drop since 2009, suggesting prices may be moderating. The firm also pointed to the signs of a slowdown in the Canadian housing market.

"The commercial real estate market also looks somewhat elevated, as CRE price indices are above prior peaks and NOI growth is decelerating," the firm added.

Homeownership To Take A Hit

Bernstein suggested that higher home prices are dissuading new homeowners from buying new homes and contributing to home improvement spend. The firm believes further price increases could put further pressure on new homeowners' ability to enter the housing market.

The firm sees the situation as signaling that the home improvement market will begin to slow down, with either higher home prices keeping new homeowners out of the market or housing prices falling and existing homeowners spending less.

Tough To Deliver Vs. Elevated Expectations

The firm doesn't think the increases in home improvement spend to date will be sufficient to deliver sustained growth going forward and spending on housing that will likely moderate over time. Although believing that home improvement is a strong subsector in retail and that is more defensible from Amazon.com, Inc. (NASDAQ: AMZN) than most, the firm said expectations are high and may prove difficult to deliver.

Rating/Price Target

  • Home Depot: Market Perform/$152.
  • Lowe's: Underperform/$69.

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Latest Ratings for HD

DateFirmActionFromTo
May 2017Atlantic EquitiesDowngradesOverweightNeutral
Feb 2017Morgan StanleyUpgradesEqual-WeightOverweight
Feb 2017BernsteinInitiates Coverage OnMarket Perform

View More Analyst Ratings for HD
View the Latest Analyst Ratings

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