Home Depot’s strong quarter shows that the housing market is still flourishing

The home improvement giant reported better-than-expected gains in sales and earnings for the first quarter on Tuesday and raised the outlook for the rest of this fiscal year. Shares of Home Depot (HD)one of the 30 shares in Dow, initially rose more than 3% before the market opened on the news, but was somewhat down in trading late in the morning.

The shares were mostly higher on Tuesday despite weak earnings from traders Walmart (WMT)another Dow component, which fell around 9%. Home Depot rival Lowes (LOW)which will report results for the first quarter on Wednesday, was down around 2%.

Home Depot has had a tough start this year because investors are worried about a possible decline in housing as interest rates and inflation zoom higher. Shares are still down almost 30% in 2022 despite Tuesday’s good news.

But new CEO Ted Decker, who took over from longtime Home Depot chief Craig Menear earlier this year, was optimistic. He noted in the earnings report that sales, which rose nearly 4% from a year ago to $ 38.9 billion, were the highest ever for the first quarter of the company’s history.

“The solid performance in the quarter is even more impressive as we compared to last year’s historic growth and met a slower start to spring this year,” said Decker.

During a conference call with analysts, Decker added that “customers continue to tell us that their homes have never been more important, and project backlogs are very healthy.” He said “that the medium- to long-term basis for the demand for housing improvement has never been stronger.”

Home Depot’s solid figures may help remove some concerns about a financial downturn and potential fall in house prices.

Yes, Federal Reserve rate hikes could lead to even higher mortgage rates. But experts point out that a tight supply of new homes combined with a continued healthy labor market should continue to drive 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 at America as Natixis CIB, in a report.

But he added that “it is unusually difficult to determine how steep the fall in house prices is due to a chronic national housing deficit – made infinitely worse by the pandemic housing boom, and ongoing supply chain problems that have hampered the completion of new homes.”

LaVorgna believes that “only a mid-digit correction in house prices next year is completely reasonable.”

In other words, house prices are unlikely to collapse completely as they did in the late 2000s. This is not a repeat of the subprime mortgage boom and the subsequent bust.

“The main problem for housing is still a lack of supply. There’s not enough out there to meet demand,” said Laura Adams, senior real estate analyst for Aceable, an online real estate education platform. “We do not expect this to be a new bubble bursting. It can only be a gradual cooling down this year and next.”