Home improvement spending results from the interplay of myriad factors, the most important of which are existing home sales, mortgage rates and home prices. Then there are other factors like unemployment rates, consumer confidence, demographics, broader economic growth, technology adoption and even the weather.
So when interest rates rise as they did through 2018 pulling mortgage rates along with them, the cost of acquiring homes goes up, pushing some buyers out of the market.
Conversely, when they stabilize as expected in 2019, people tend to reach for their wallets. Mortgage guarantor Freddie Mac says that already, improving sentiments about interest rates have pushed down the 30-year mortgage rate to its 10-month low of 4.41% (week ending Feb 7). Rest assured that this will help drive existing home sales (90% of all home sales in the U.S.) going forward.
One factor that has consistently thrown water on the bear market theory is unemployment rates. Despite the slight uptick in January (partly on account of the government shutdown rather than economic weakness), the unemployment rate of 4% remains at historic lows. What’s more, the labor force participation rate, at 63.2% and the employment-population ratio, at 60.7% edged up 0.5 points from last year. A low unemployment rate increases consumer confidence, which again encourages home sales.
As far as demographics are concerned both baby boomers and millennials participate in the home improvement market. Older millennials are the ones going for new homes and as may be expected, they want them smart. So they spend not just on the home but also on technology. Younger millennials prefer to rent, which is a negative for home sales, but not so for home improvement. Also, with millennials gradually getting into the home buying market, demand is relatively less elastic, supporting relatively stronger pricing.
Baby boomers on the other hand generally prefer home improvements, and that includes technology adoption. Remember these are the folks that have spent fortunes on their homes because of which they are loathe to move. They would much rather renovate or add smart home technology.
Contrary to popular perception, a growing percentage of this group is spending on things like Internet-connected TV, streaming video, digital devices for photo viewing and Netflix, as the American Association of Retired Persons (AARP) finds. eMarketer finds that 8.2 million baby boomers were using smart speakers in 2018, up 28.1% from 6.4 million in 2017.
The uncertainty in weather conditions encourage home improvement spending to deal with untoward weather conditions.
The Home Depot HD and Lowe's Companies LOW dominate the market, and both have a Zacks Rank #3 (Hold) and VGM score A.
Other stocks in the Zacks-classified Building products-Retail industry are Zacks #2 (Buy) ranked Beacon Roofing Supply BECN, Lumber Liquidators Holdings, Inc LL and Fastenal Company FAST. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
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