Home Depot stands to gain as home prices hit 9-year low

Lennar Corp. reported an average selling price of $371,000 in its fiscal second quarter, the lowest in nine years, as the homebuilder offered nearly 13 percent in incentives to revive demand as persistent affordability constraints weighed on the market.

"Consumer uncertainty and housing affordability have been the primary factors influencing home improvement decisions," Home Depot Chief Executive Officer Ted Decker said after the retailer's fiscal first-quarter results, explaining why homeowners have favored smaller projects over major renovations.

The National Association of Realtors' Housing Affordability Index rose to 105.6 in May from 97.5 a year earlier, showing improving conditions for buyers. The 30-year fixed-rate mortgage averaged 6.47 percent in the week ending June 18, down from post-conflict highs but above the 5.9 percent level recorded at the end of February, according to Freddie Mac data.

For Home Depot, the largest home-improvement retailer with $165 billion in annual sales, a sustained recovery in homebuying would translate into higher renovation spending. The company's same-store sales rose just 0.4 percent in its fiscal first quarter, and management expects flat to 2 percent comparable sales growth for the full year.

Lennar delivered 20,519 homes in the period ended March 31, up 2 percent from a year earlier, but the average price of $371,000 reflected the steepest discounting since at least 2017. The builder's strategy of using incentives and base-price adjustments to move inventory shows the affordability gap that has suppressed transaction volumes across the housing market. Existing-home sales have remained well below pre-pandemic averages as high borrowing costs and elevated prices kept potential buyers on the sidelines, creating a backlog of demand that lower prices could unlock.

Home Sales Drive Renovation Demand

When households purchase a home, they typically undertake improvement projects within the first 12 to 18 months, ranging from painting and flooring to kitchen and bathroom renovations. That pattern broke down over the past two years as elevated mortgage rates and record home prices pushed existing-home sales lower, starving Home Depot and Lowe's of their most reliable source of project demand. Home Depot's same-store sales growth of 0.4 percent in the fiscal first quarter reflects that dynamic, with consumers opting for smaller, discretionary projects rather than full-scale renovations. A recovery in home sales would reverse that trend, shifting the mix back toward larger, higher-margin projects.

Home Depot has responded by expanding its professional contractor business, acquiring SRS Distribution for $18.3 billion in 2024 and GMS for $5.5 billion to deepen its reach among builders and trade professionals. The strategy gives the retailer the ability to capture a larger share of renovation spending when the cycle turns. Lowe's, its nearest competitor with roughly $84 billion in annual revenue, has pursued a similar strategy but lacks the scale of Home Depot's contractor network and pro-focused distribution.

The improving affordability picture — lower prices, moderating mortgage rates and rising household incomes — suggests that turning point may be approaching. Home Depot shares have fallen 2.9 percent this year through June 18, compared with the S&P 500's 9.6 percent gain, pushing the stock's price-to-earnings ratio to 24 from 28 earlier this year. The broader index trades at 32 times earnings, making Home Depot one of the cheaper large-cap consumer stocks by that measure. For context, the stock traded at an average P/E of 22 over the past decade, suggesting current levels are not stretched even before a potential demand recovery.

For investors, the question is timing. Lower home prices do not immediately translate into higher transaction volumes; the process of matching buyers with sellers and securing financing takes months to play out. But the trajectory is clear: as housing becomes more affordable, home sales should recover, and with them, the renovation projects that drive Home Depot's revenue. The company's expanded contractor business provides an additional lever, allowing it to benefit from both DIY homeowner projects and professional installation work when demand returns. Home Depot's current valuation, at 24 times earnings, offers a discount to the broader market that assumes the housing downturn persists — a bet that lower home prices may already be reversing.

This article is for informational purposes only and does not constitute investment advice.