Citi explains why home improvement stocks are lagging in 2026

Citi expects U.S. home-improvement demand to remain flat over the next 12 months, constrained by elevated mortgage rates, weak housing affordability and project cancellations. About 80% of mortgaged homeowners have rates below 6%, while roughly one-third of homeowner projects are delayed or cancelled and 60% of contractors report at least one cancellation. Maintenance demand, $450,000 of average household equity and an aging 44-year-old housing stock support the long-term outlook, but recent sector-stock weakness indicates investors are pricing sluggish growth potentially extending into 2027.

Analysis

The key earnings distinction is not aggregate home-improvement demand but mix: deferred discretionary remodels pressure big-ticket categories, installation services and project financing, while repair/maintenance preserves traffic but carries lower basket size and potentially more promotional intensity. LOW is more exposed to a homeowner-led recovery than HD, whose larger professional-customer mix and faster-turn repair demand should make it relatively more resilient if housing turnover remains constrained. This favors relative, not outright, positioning over the next 1-3 months as investors parse whether same-store sales stabilization is volume-led or simply reflects pricing.

The longer-duration opportunity is a release of locked-in housing demand once mortgage rates approach a psychologically actionable threshold, but this should be treated as an option on rates rather than a base-case 2026 earnings event. A meaningful improvement in resale transactions would lift project initiation, appliances, flooring, paint and installation attach rates with a lag of roughly one to two quarters; HD, LOW, SHW and MAS would benefit, while affordability deterioration would preserve the repair-only mix. AI-driven labor and back-office efficiencies are unlikely to offset weak demand near term, and should not support multiple expansion until retailers demonstrate lower SG&A or improved contractor conversion in reported results.

Consensus may be overly focused on a binary housing-recovery call. Extended home tenure creates recurring maintenance demand, but household equity is not equivalent to spendable liquidity: consumers facing elevated borrowing costs can defer equity-funded discretionary projects despite strong nominal balance sheets. The downside thesis is falsified if existing-home sales, project-financing originations and big-ticket comparable sales inflect together; absent that combination, a broad sector rerating is premature even if headline rates decline modestly.

Key Decisions for Investors

• Initiate a 1-3 month pair trade: long HD / short LOW in equal dollar amounts. HD should better defend comparable sales and gross margin under a repair-heavy, contractor-led demand mix; exit if LOW reports accelerating transaction growth or materially stronger project-installation backlog relative to HD.
• Do not add an outright LOW short after sector weakness without evidence of further estimate cuts. Use the next earnings update as the decision point: a downgrade in full-year comparable-sales or margin guidance would validate downside, while stable guidance plus improving big-ticket transactions would remove the short catalyst.
• Set a housing-recovery watch trigger rather than pre-positioning aggressively: sustained mortgage rates near 5%, improving existing-home sales, and sequential growth in financing/installation demand would justify rotating from the HD/LOW relative trade into a basket long LOW, SHW and MAS over a 6-18 month horizon.
• Treat any AI-related multiple expansion in LOW as sellable unless it is accompanied by measurable SG&A leverage, improved conversion, or contractor productivity metrics. The near-term risk/reward remains tied to consumer project budgets and housing turnover, not automation narratives.