It is anticipated that a key indicator of U.S. housing prices will experience a slight increase again in August, which is good news for the home improvement industry. According to FactSet's forecast, economists predict that the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index will grow by 0.2% month-on-month and 5.1% year-on-year in August after seasonal adjustment. Although this indicator is somewhat lagging compared to other housing price metrics, its design removes disturbances such as housing size and physical characteristics, making it relatively more accurate.
If this forecast comes true, it will mark the 14th consecutive month of year-on-year increases in housing prices. According to the latest forecasts from Fannie Mae and the Mortgage Bankers Association, the housing price index is expected to continue rising until 2025.
As housing prices rise, homeowners' home equity is also increasing. Data from mortgage data company ICE shows that as of the second quarter, mortgage holders' home equity reached a historical high of $17.6 trillion, with $11.5 trillion being withdrawable equity. This means that homeowners can use this equity as collateral for loans while maintaining a 20% home equity stake.
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However, most homeowners are reluctant to do so. Andy Walden, Vice President of Research and Analysis at ICE, stated that home equity loans have been weak since interest rates rose at the beginning of 2022. He pointed out that high financing costs are the main reason. "The Federal Reserve's increase in short-term loan rates makes it more expensive to withdraw equity, and despite the record high withdrawable equity, the growth in such loans remains weak."
A team of analysts at TD Cowen pointed out in a research report on Monday that as the Federal Reserve begins to lower interest rates, it is a good time for homeowners to use home equity. The analysts believe that high equity levels and rising housing prices are one of the reasons for the recovery of the home improvement industry, with one retailer set to benefit.
The analyst team believes that the timing of the Federal Reserve's rate cuts is very ideal, as real estate is the largest asset for many families and has significantly appreciated. "Lower interest rates will make it easier for homeowners to withdraw equity."
In addition, other favorable factors include: the current median age of homes is 45 years, and many homes need upgrading and renovation; millennials are buying homes, and older homeowners also wish to age in place, increasing housing demand; and the relative shortage of new homes will continue to push up housing prices and drive home improvement demand. Analysts believe that these long-term trends may bring about a "golden age" for the home improvement industry.
However, the recovery of the home improvement industry will not happen overnight. Analysts stated, "In the short term, we believe the industry will continue to face pressure in the next few quarters as home improvement consumer spending falls back." They predict that the home improvement market cycle will gradually rebound, with 2025 seen as a transition year and 2026 potentially welcoming strong growth. The team expects the total addressable market size of the North American home improvement market to grow from over $1 trillion in 2023 to $1.175 trillion in 2027.
Analysts believe that Home Depot (HD.US) will benefit from this recovery and have reiterated their "buy" rating for the stock. Home Depot's professional business is particularly advantageous, as it provides materials to professionals such as contractors, property managers, and renovators, with growth in this sector expected to exceed the growth in the DIY sector.