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Home Depot, Lowe's benefit from surge in remodeling

Claudia Brown, a kitchen and bathroom designer for Home Depot Inc. (HD), is witnessing what she’s rarely seen in the past six years: customers knocking down walls again.

“People aren’t hesitant; they’re getting what they want,” Brown, who works in Greensboro, North Carolina, said earlier this month after selling a kitchen project costing more than $13,000 and a bathroom remodel for $3,700.

Spurred by rising home prices, homeowners who spent the worst housing downturn since the Great Depression taking on only must-do repairs like fixing leaky faucets or minor upgrades like painting are again starting wish-list projects. Those revamps, even in the face of still-tight lending conditions, include additions costing hundreds of thousands of dollars and replacing laminate countertops with marble that’s twice as expensive.

Spending for U.S. remodeling in the 12 months through Sept. 30 may climb 20 percent from a year earlier to $145.5 billion, according to a forecast by Harvard University’s Joint Center for Housing Studies.

“When the sky is no longer falling, when prices are improving, homeowners are willing to invest,” said Scott Mosby, co-owner of St. Louis-based Mosby Building Arts, an architectural and remodeling company.

Mosby, 59, is renovating the basement of a St. Louis home for $230,000, including $40,000 to add a wine cellar. He estimates he’ll collect an average of $130,000 for major projects this year, up from about $90,000 in 2010.

Shifting Gears

After years of trimming costs, firing workers and slowing store openings, Home Depot and Lowe’s Cos. (LOW) recently shifted to preparing for the wave of remodeling. Home Depot acquired a company that measures flooring installation in houses in May and another that remodels kitchens and baths in October.

Lowe’s is hiring 9,000 permanent part-time workers this year as it sells more appliances and bathroom fixtures. Both retailers have improved online services allowing homeowners to design projects and communicate with employees as work progresses.

Homeowners are giving themselves “the psychological permission to spend it and feel good about it,” Lowe’s Chief Executive Officer Robert Niblock said on a conference call March 13.

Niblock told (LOW) analysts consumers are experiencing “tight credit conditions,” impeding the pace at which housing and the home improvement sector will grow over the next two years. Home Depot CEO Frank Blake likened the housing recovery to a “gradual thawing process” pressured by credit constraints and less disposable income for the retailer’s customers.

Credit Standards

A Federal Reserve survey of banks found that 59 percent of institutions had left basically unchanged credit standards for approving home-equity lines of credit at the end of 2012. On the question of their willingness to make consumer installment loans, 54 percent of banks said their willingness was basically unchanged, the Fed said in the survey released Feb. 4.

U.S. home prices slumped for almost six years through March 2012, declining by more than a third. In the fourth quarter of last year, rebounding prices boosted household wealth to the highest in five years, according to the Fed.

Home Depot’s Brown, 44, says she doesn’t have time for lunch some days as she fields about 50 queries a week from homeowners, real-estate agents helping clients dress up homes to sell and investors flipping real estate. Three out of five customers who ask Brown for a price quote on a renovation actually have work done, compared with one in three customers three years ago.

Shares Gain

The rebound has driven up the retailers’ shares, with Atlanta-based Home Depot more than tripling from the end of 2008 through yesterday and Mooresville, North Carolina-based Lowe’s advancing 80 percent. The Standard & Poor’s 500 Index’s 72 percent gained during that time.

Home Depot slipped 0.1 percent to $69.28 at 9:32 a.m. in New York. Lowe’s gained 0.6 percent to $38.99.

Home Depot may have climbed too much as investors anticipated more of a housing recovery than has occurred, said Budd Bugatch, an analyst at Raymond James & Associates in St. Petersburg, Florida. The retailer closed at a 47 percent premium (HD) to the S&P 500 on a price-to-earnings basis yesterday, compared with a 12 percent average premium in the past five years.

“If we do get that recovery, it’s already priced into the stock,” Bugatch said. He rates Home Depot and Lowe’s market perform, the equivalent of a hold.

Recovering Market

Home Depot Chief Financial Officer Carol Tome said in a telephone interview last month that the market still has a way to recover. An estimated 13.8 million mortgages, about 28 percent of those outstanding in the U.S., had negative equity as of Dec. 31, according to Seattle-based Zillow Inc., the operator of the largest real-estate information website.

“When people start to think of their home as an investment and not an expense, that should be the driver of an improving discretionary spending environment,” said Tome, who also serves as deputy chairwoman of the Atlanta Fed.

Bill Smead, whose Seattle-based investment firm owns 180,447 Home Depot shares, sees two waves of consumers spending to fix up their houses: younger adults making their first purchases and longtime homeowners like Smead himself.

Smead, 54, and his wife, Becky, are downsizing and selling their 4,400 square-foot home in Shoreline, Washington, after spending more than $110,000 on improvements such as new windows and a $2,600 kitchen range.

“The housing recovery is shifting into gear,” said Smead, who oversees $324 million as chief executive officer of Smead Capital Management.

Marble Countertop

Ross Bolton and Jeannie Hoag just spent $120,000 to remodel the Greensboro home they’ve owned for 13 years. They added a living as well as a bathroom with a marble countertop and sink, replaced windows and upgraded the exterior with siding, stone and shingles. A year earlier, the married couple remodeled the kitchen themselves.

“I wouldn’t have done it if I couldn’t have afforded it,” said Bolton, 52, who sells telephone systems to small businesses. “My business is steady.”

Jim Kreipe, owner of Square Deal Remodeling Co. in Portland, Oregon, said that for the first time in five years, he’s doing a renovation where a bank loaned money based on the value of the improvements, not just the home’s equity.

“That is a sure sign that from the bank’s point of view that housing is stabilizing and isn’t going to get any worse,” Kreipe, 60, said in an interview.

Kreipe, who started his company two decades ago, is wrapping up a two-story addition to a Portland home for $200,000, about four times the value of his average project. The homeowners first approached him about the expansion about three years ago and proceeded in December.

“There is a growing need, a buildup,” Kreipe said. “It’s not an all-out assault of work as it was five years ago. But you can only put off work on your home for so long.”

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