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Home Depot's lackluster Q1 shows that remodeling boom is over

Interest in big home improvement projects is waning. That's one takeaway from Home Depot's uninspired first-quarter results.

"The size of the projects are getting a bit smaller," Home Depot (HD) CEO Ted Decker told analysts on the company's first quarter earnings call Monday.

"It could be that the projects [are] being deferred or it could be that the project is being broken up into chunks," Decker said. "Rather than do an entire room or an entire basement, you start working it in smaller chunks and that clearly impacts items per basket in overall activity."

On a yearly basis, customer transactions slid 4.8%, but came in better than Wall Street’s call for a 5.36% drop. Customers also spent less per ticket than anticipated, recording a 0.2% gain against expectations of a 2.63% boost in average ticket sizes.

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Big-ticket transactions, or those over $1,000, were down 6.5% compared with the first quarter of last year. Customers also shied away from flooring, kitchen, and bath during the quarter, another potential signal that they are downsizing projects.

DIY customers also outperformed the professionals sector as demand shifted toward smaller projects, Home Depot said.

That jibes with other research on remodeling.

Aerial view of The Home Depot store and parking lot in San Diego, California, USA. Home Depot is the largest home improvement retailer and construction service in the US.
Aerial view of The Home Depot store and parking lot in San Diego, California, USA. Home Depot is the largest home improvement retailer and construction service in the US. (Thomas De Wever via Getty Images)

John Burns Research and Consulting's remodeler index survey noted this home improvement softness in its April report. Just over half of remodelers surveyed said first quarter projects were smaller in scope because of less extensive work, while 20% said customers would rather tackle the project themselves than hire a professional.

Similarly, home remodeling is expected to drop by early next year, according to the Leading Indicator of Remodeling Activity (LIRA) released in April by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

LIRA projected that year-over-year expenses for homeowner improvements and maintenance will result in a 2.8% drop through the first quarter of 2024.

"Higher interest rates and sharp downturns in homebuilding and existing home sales are driving our projections for sluggish remodeling activity next year," Abbe Will, senior research associate and associate project director at the Remodeling Futures Program, wrote in a blog post last month. "With ongoing uncertainty in financial markets and the threat of a recession, homeowners are increasingly likely to pare back or delay projects beyond necessary replacements and repairs."

Homeowner renovating home kitchen
(Photo: Getty Creative) (Vincent Ricardel via Getty Images)

Home prices and higher mortgage rates may also play a role in where remodeling activity goes.

"There's generally a lag effect to home price appreciation or depreciation," Decker said. "I think the difference here is how sensitive are people going to be. [They were] up 45% in home value from the end of 2019, [and] now month over month, the values are off slightly, but still up 40% or 38% from where it was at the end of 2019."

And home prices have started to rise again on a monthly basis after contracting some this winter. Meanwhile, executives touched on the locked-in effect that many homeowners — who may have listed their homes under more favorable interest rate conditions — are feeling.

"In this environment, if you have a low fixed rate mortgage, and let's just remind ourselves, 40% of owner-occupied homes are owned outright. And of the households that hold the mortgage, close to 90% of those hold fixed rate mortgages under 5%. So with mortgage rates where they are today, there's a reluctance to sell your home, and there is a greater incentive to stay in place and improve in place," Home Depot CFO Richard McPhail said on the call.

"You're spending more time at home and that home is getting older and you do not have an incentive to sell and take on a higher rate mortgage," he said. "So I think we've already seen that in housing turnover."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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