Home Depot Inc. (HD:US) Chief Executive Officer Frank Blake said rising home prices this year will spur renovation spending, helping the retailer even as increasing mortgage rates put pressure on the U.S. housing recovery.
“As we look into the back half of 2013, we continue to see the housing market improving -- not a blistering pace but a steady, steady improvement,” Blake, 64, said in an interview at Bloomberg’s New York headquarters yesterday.
Analysts project rising borrowing costs will squeeze property sales, which in turn could damp demand for big-ticket items such as fridges, jacuzzis and granite counters at Home Depot, the biggest U.S. home improvements retailer. Purchases of new U.S. homes sank 13.4 percent in July, the most in more than three years as mortgage rates have climbed since May.
The Atlanta-based company will continue to benefit this year from a surge in business from private equity firms and other investors fixing up properties and renting them out, Blake said. The chain operates a unit catering to these customers, who favor products that are durable and easy to replace, Blake said.
For these buyers, “style isn’t your top consideration,” he said. Their mindset is to turn around the investment “in a couple of years.”
The average rate on a 30-year, fixed-rate loan rose to 4.57 percent this week, close to a two-year high, according to McLean, Virginia-based Freddie Mac.
Still, a shortage of property inventory and an improving jobs market is buoying house prices. The S&P/Case-Shiller index of property values in 20 cities rose 12.1 percent in June from the same month in 2012 after rising 12.2 percent in the year ended in May, which was the biggest gain since March 2006.
“As home prices go up, people start going, ‘OK, my house is now back to being a significant source of value for me,’” Blake said.
Pent-up demand by homeowners who delayed spending in the housing downturn “is working in Home Depot’s favor,” said William Smead, who oversees about $600 million including the retailer’s shares as CEO of Smead Capital Management in Seattle.
“For homeowners, there’s a lot of work that goes on all of the time,” Smead said today by telephone. “People postponed a lot of that work.”
Analysts on average project Home Depot’s revenue will increase 5.1 percent this fiscal year to $78.6 billion, according to data compiled by Bloomberg. That trails growth of 6.2 percent in the previous year. Home improvement spending in the second-half periods of 2011 and 2012 was boosted by hurricane damage, Blake said.
Home Depot fell 0.4 percent to $72.70 at the close in New York. The shares have gained 18 percent this year, compared with a 16 percent advance by the Standard & Poor’s 500 Index.
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