Home Depot’s strong quarter shows housing market is still booming

The home improvement retail giant reported better-than-expected gains in sales and earnings for the first quarter Tuesday and also lifted its outlook for the rest of this fiscal year. Shares of Home Depot (HD) rose more than 2{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} in early trading on the news.

Home Depot, which is one of the 30 stocks in the Dow, helped lift the overall market as well. Stocks were broadly higher Tuesday despite weak earnings from retailer Walmart (WMT), another Dow component. Walmart fell about 7{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9}. Home Depot rival Lowe’s (LOW), which will report its first quarter earnings Wednesday, was up nearly 3{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9}

Home Depot has gotten off to a rough start this year because investors are concerned about a possible pullback in housing as interest rates and inflation zoom higher. Shares are still down more than 25{3b930a6ca12a59604e1bbadfc55b7d1b7a0aa8613f1ab9377cace0d5afcb5fb9} in 2022 despite Tuesday’s rally.

“The solid performance in the quarter is even more impressive as we were comparing against last year’s historic growth and faced a slower start to spring this year,” Decker added.

Home Depot’s solid number may help dispel some concerns about an economic slowdown and potential drop in housing prices.

Yes, the Federal Reserve’s rate hike plans may lead to even higher mortgage rates. But experts point out that tight supply for new homes coupled with a still healthy job market should continue to fuel home sales. That’s good for Home Depot.

Higher mortgage rates will “undoubtedly pour some cold water on the housing market,” said Joe LaVorgna, chief economist of the America as Natixis CIB, in a report.

But he added that “ascertaining the steepness of the home price slowdown is unusually difficult due to a chronic national housing deficit — made infinitely worse by the pandemic housing boom, and ongoing supply chain issues which have inhibited the completion of new homes.”

LaVorgna thinks that “just a midsingle digit correction in home prices over the next year is entirely reasonable.”

In other words, it is unlikely that housing prices will completely collapse like they did in the late 2000s. This is not a repeat of the subprime mortgage boom and subsequent bust.

“The main issue for housing is still the shortage of supply. There is not enough out there to meet demand,” said Laura Adams, senior real estate analyst for Aceable, an online real estate education platform. “We’re not expecting this to be another bubble that bursts. There may just be a gradual cooling off this year and next year.”