An important indicator of U.S. home prices is expected to show a slight increase in August, signaling positive news for the home improvement industry. Economists anticipate the S&P CoreLogic Case-Shiller 20-City Home Price Index to rise by 0.2% from the previous month and by 5.1% year-over-year, after seasonal adjustments. This index is valued for its accuracy as it accounts for variations such as home size and physical characteristics.
If these predictions hold, it will mark the 14th consecutive month of year-over-year home price increases. Projections from Fannie Mae and the Mortgage Bankers Association suggest that the home price index will continue to rise through 2025. As home prices increase, homeowner equity is also reaching new heights. According to mortgage data firm ICE, homeowner equity hit a record $17.6 trillion in the second quarter, with $11.5 trillion being tappable equity—equity that homeowners could borrow against while maintaining 20% ownership in their home.
However, homeowners have been hesitant to tap into this equity. ICE's Vice President of Research and Analytics, Andy Walden, noted that since early 2022, rising interest rates have made home equity loans less attractive due to the higher costs of borrowing. Despite this, analysts from TD Cowen suggest that the current timing is favorable for homeowners to leverage their equity as the Federal Reserve is expected to reduce interest rates, making borrowing more economical.
The analysts emphasize that the home improvement sector is witnessing a recovery driven by high equity levels and rising home prices. Additionally, several factors such as the aging median home age of 45 years, Millennials purchasing homes, older homeowners wishing to age in place, and a shortage of new homes, are contributing to increased home renovation demand. These trends hint at a potential "golden era" for the industry in the long term.
Nonetheless, the recovery in home improvement will not be immediate. Analysts predict that the sector will face pressures over the next few quarters due to a dip in consumer spending on renovations. They foresee a gradual market recovery, with 2025 as a transition year and a stronger growth phase anticipated in 2026. The potential market size of the North American home improvement industry is expected to grow from over $1 trillion in 2023 to $1.175 trillion by 2027.
Home Depot (HD, Financial) is projected to benefit from this recovery. Analysts reaffirm a "buy" rating on the stock, highlighting its professional business segment's strength. Home Depot's ability to supply contractors, property managers, and renovation professionals is expected to drive growth beyond the DIY segment.
