Homebuilder Woes Are More Good News for Home Depot and Lowe's

(Bloomberg) -- Soaring lumber prices, rising mortgage rates and a dearth of skilled workers are a triple threat looming over the housing industry right now. That spells bad news for homebuilders, but not for home-improvement chains.

That’s because anything that slows production of new homes -- like an industry labor shortage -- should increase demand for existing ones, and, in theory, boost their values. Rising home prices convince people to see their residences as investments and make them feel better about renovating a bathroom or adding a patio to the backyard with the help of Home Depot Inc. or Lowe’s Cos.

Homebuilder Woes Are More Good News for Home Depot and Lowe's

“We don’t build houses, and we don’t really play to” people buying newly-built homes, Home Depot Chief Financial Officer Carol Tome said in a recent interview, citing the 123 million occupied homes in the U.S. that far exceed the approximately 1 million housing starts expected this year. “What matters is the occupied housing base. That’s a lot of households for us to sell to.”

Inventory constraints in the U.S. housing market are only getting worse, with millennials increasing demand by settling down and having kids, after waiting longer than previous generations to start families. Home Depot tracks the percentage of young adults living at home, and it peaked at 32 percent in 2016 and is now declining.

“For the first time in a long time, this trend is actually reversing,” Richard McPhail, Home Depot’s senior vice president of finance, said during a presentation earlier this year. “They’re moving out and creating households.”

Homebuilder Woes Are More Good News for Home Depot and Lowe's

But there aren’t a lot of empty homes just waiting to be bought. In April, there were four months of supply out there in the U.S. -- back to the pre-recession levels of the housing boom. In many of the hottest markets, like San Francisco and New York, there is much less inventory, partly because of stricter zoning laws and a lack of space.

A lack of skilled workers continues to slow down the home-building industry. Toll Brothers Inc., the biggest producer of luxury homes, last month saw its stock fall the most in almost a decade, and an index of home builder stocks has plummeted this year, even as the broader market -- including Home and Lowe’s -- has gained.

Homebuilder Woes Are More Good News for Home Depot and Lowe's

Fewer new homes means people are staying put longer. The age of the U.S. housing stock is only getting older, which leads to more repairs and trips to Lowe’s and Home Depot, which have about $170 billion in combined annual sales. In 2016, 51 percent of residences were more than 40 years old, up from 40 percent in 2005, according to John Burns Real Estate Consulting.

What it all boils down to is higher home values are the most important indicator of home-improvement store performance. Robert Niblock, who’s retiring this summer after 13 years as chief executive officer of Lowe’s, reiterated that point during his final conference call with investors.

“The home improvement industry is poised to grow its share of overall consumer spending,” Niblock said. “Housing is expected to remain a positive driver, as demand in excess of supply drives home price appreciation.”

©2018 Bloomberg L.P.