Interest in large home improvement projects is waning. Here’s a quick takeaway from Home Depot’s uninspiring first-quarter results.
“The volume of projects is getting a little bit smaller,” Home Depot (HD) CEO Ted Decker told analysts on the company’s first-quarter earnings call Monday.
These could be projects [are] “It gets delayed or the project may be broken into pieces,” Decker said. “Instead of doing a whole room or a whole basement, you start working in smaller chunks and that clearly affects the items per basket in the overall activity.”
On an annual basis, customer transactions fell 4.8%, but it came in better than Wall Street’s call for a 5.36% decline. Customers also spent less per ticket than expected, posting a gain of 0.2% against expectations of a 2.63% increase in average ticket volumes.
Big ticket transactions, or those over $1,000, were down 6.5% compared to the first quarter of last year. Customers also moved away from flooring, kitchen and bathrooms during the quarter, another potential signal of downsizing in projects.
DIY customers also outperformed the professionals segment as demand shifted toward smaller projects, Home Depot said.
This is consistent with other research on redesign.
John Burns Research and Consulting’s redesign index survey I noticed this home improvement resilience in the April report. Just over half of remodelers surveyed said Q1 projects were smaller in scope due to less labor intensive work, while 20% said clients would rather tackle the project themselves than hire a professional.
Likewise, home remodeling is expected to decline by early next year, according to the Leading Index of Remodeling Activity (LIRA) released in April from the Future Remodeling Program at the Joint Center for Housing Studies at Harvard University.
The LIRA projected that annual expenses for homeowner improvement and maintenance will decrease by 2.8% during the first quarter of 2024.
“Rising interest rates and a sharp slump in home construction and existing home sales are driving our forecast for sluggish remodeling activity next year,” Abby Weill, senior research fellow and associate project director for the Remodeling Futures Program, wrote in a blog post last month. “With continued uncertainty in financial markets and the threat of a recession, homeowners are increasingly likely to scale back or delay projects until after necessary replacements and repairs.”
Higher home prices and mortgage rates may also play a role in where the remodeling business goes.
“There is generally a lag effect on home prices going up or down,” Decker said. “I think the difference here is how sensitive people are. [They were] 45% increase in home value compared to the end of 2019, [and] Now month-over-month, the values are slightly different, but still 40% or 38% higher than they were at the end of 2019.”
Home prices are starting to rise again on a monthly basis after contracting some this winter. Meanwhile, the executives touched on the lock-in effect felt by many homeowners–who might have listed their homes under more favorable interest rate conditions.
“In this environment, if you have a low fixed-rate mortgage, and let’s just remind ourselves, 40% of owner-occupied homes are wholly owned. Among households that have a mortgage, nearly 90% of those homes have mortgages.” It has a fixed rate of less than 5%. So with mortgage rates where they are today, there’s more reluctance to sell your home, and there’s more incentive to stay where it is and improve it,” Home Depot CFO Richard McPhail said on the call.
“You’re spending more time in the house and that house is getting older and you have no incentive to sell and take out a higher mortgage,” he said. “So I think we’ve already seen that in the housing turnover.”
Danny Romero is a reporter at Yahoo Finance. Follow her on Twitter @tweet
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