Home Depot, Lowe’s May Be Hit by Real Estate Trends

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Today’s report from the National Association of Realtors (NAR) on existing home sales in June may mean that there is trouble brewing for home improvement centers like The Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW). And it’s not just because sales were down in June.

In order for home improvement stores to thrive, consumers have either to buy an existing home and fix it up, or fix up the houses they now have. The larger expense for a homeowner is buying an existing home and fixing it up, and that’s where Home Depot and Lowe’s want to be.

The NAR’s June report shows that the inventory of existing homes for sale is up nearly 2% from May, to 2.19 million homes, a supply of 5.2 months. But there’s a significant caveat — last June the supply of existing homes was 7.6% higher than it is this year.

Is the U.S. at or near a bottom in existing home inventory? If so, how long will it remain there? And what about new home construction? How will that affect existing home inventory?

Inventory reached a 12-year low of 1.85 million homes for sale in January and has been climbing out of that hole for the past few months as the home-buying season got into full swing. Part of the reason for the improvement is the lack of new homes for sale.

New home sales in May reached a seasonally adjusted annual rate of 476,000, still only about a third of the annual rate at the peak of the housing boom in 2005. As homebuilders get rolling again, demand for new homes could displace sales of existing homes.

That would not be a good thing for sellers, real estate brokers, or home improvement stores.

Home Depot’s stock is down about 0.1% in the early afternoon today at $79.80 in a 52-week range of $49.77 to $81.56.

Lowe’s stock is up 0.9% at $44.50 in a 52-week range of $24.76 to $44.55.