Homeowners spend on renovations and repairs despite the uncertain economy and higher prices

Despite economic uncertainty and rising prices, U.S. homeowners are increasing spending on home renovations and repairs, with building materials retail sales rising 0.8% in April, a significant increase compared to overall retail sales which only rose 0.1%. This trend is driven by factors such as elevated mortgage rates discouraging moves, an aging housing stock, and homeowners opting to improve their existing properties rather than selling, although the Harvard University's Joint Center for Housing Studies notes that a worsening housing market or broader economic downturn could temper future spending.

Analysis

U.S. homeowners are demonstrably increasing expenditure on home renovation and repair projects, a trend that contrasts with the broader pullback in consumer spending amidst an uncertain economic climate. Sales at building materials and garden supply retailers surged 0.8% month-over-month in April, marking the most significant increase since 2022, and were up 3.2% year-over-year, while overall U.S. retail sales saw a modest 0.1% rise. This resilience is attributed to several factors: elevated mortgage rates, currently hovering near 7%, are discouraging homeowners with existing low-rate mortgages (sub-3% or 4%) from selling, thereby incentivizing them to invest in their current properties. Furthermore, a significant portion of U.S. owner-occupied homes, nearly half of which were built before 1980 with a median age of 41 years, necessitates ongoing repairs and improvements. Despite rising costs for home repairs and remodeling, which climbed nearly 4% year-over-year in the first quarter according to Verisk's Remodel Index primarily due to labor costs, spending remains robust. Home Depot (HD) indicated it does not plan to raise prices due to tariffs, citing supply chain diversification, but cautioned that some products might become unavailable and noted a decrease in large-scale renovation projects like kitchen and bath remodels, likely due to higher interest rates impacting financing. Harvard University’s Joint Center for Housing Studies (JCHS) projects continued growth in home renovation spending, forecasting a rise to $526 billion by the first quarter of next year, a 2.5% increase from the first quarter of this year's $513 billion. However, JCHS also warns that this outlook is contingent on stable housing market conditions and a positive economic environment, noting that a downturn in existing home sales, worsening job market, or higher inflation could temper these expectations.

Key Decisions for Investors

• Investors should acknowledge the sustained demand in the home renovation sector, fueled by homeowners' reluctance to move due to high mortgage rates and the necessity of maintaining an aging housing stock, which presents opportunities for building material suppliers and home improvement retailers.
• For specific equities like Home Depot, while the overall trend is supportive, it's pertinent to monitor shifts in project scale, as the company reports fewer large remodels, and potential impacts from supply chain adjustments or product availability.
• Closely track macroeconomic indicators such as mortgage rates, existing home sales volumes, median sales prices, and employment data, as the JCHS indicates that adverse changes in these areas pose a significant risk to the continued growth in home improvement spending.