Home Depot earnings show what's really going on in the housing market

Home Depot’s latest results reveal the real state of the U.S. housing market — neither frozen nor crashing, but drifting sideways in a slow, uneven correction.

For the quarter ending November 2nd, the DIY retailer reported modestly positive revenue growth — sales up 2.8%, helped in a big way by its acquisition of GMS — but tellingly, same-store sales were essentially flat, rising just 0.2%.

According to CEO Ted Decker, it was precisely the lack of catalysts that resulted in “greater than expected pressure,” i.e. a challenging environment for the company. The acceleration in demand the management hoped for in the third quarter “did not materialize.” All in all, “consumer uncertainty and continued pressure are disproportionately impacting home improvement demand,” Decker said.

Decker’s sense of unease and hesitation maps cleanly onto the broader housing market. Even as the data points in different directions, it nevertheless suggests the sector is undergoing a correction rather than a more obvious and expected boom-bust cycle.

The real state of the housing market

After years of steep increases in most major metro areas, house prices are falling, but more so in some places than others. Zillow estimates that 53% of U.S. homes have lost value over the past year, the largest share since 2012, and largely concentrated in boomtowns across the South and West. Bucking the trend? In some pockets of the Midwest and Northeast where inventory remains extremely tight, you have some modest appreciation, but now they appear to be the the exception that proves the rule.

So regional disparities are real while overall demand is “soft,” as analysts tend to put it, if not dead. Mortgage applications rose nearly 6% last week to their strongest pace since September, even as the average 30-year fixed rate hovered around 6.3%. Refinancing activity — running more than double last year’s levels — is fairly strong, yet still volatile. Consumers want to move, and at least a certain amount of home owners want to sell, but neither seems very convinced the moment is right.

Home Depot’s numbers reflect that uncertainty like a mirror

The company’s flat comps show just enough activity to sustain turnover but no sign of a renovation or DIY boom, either. For the retailer, investors, flippers, and contractors often drive big-ticket spending, but they’re not doing so now. Most of all, the company’s complaint about a “lack of storms” points to the deepest issue — the lack of a why. Why flip a house if prices remain too high to ensure a fat profit? Why buy a house if mortgage rates remain high and the government is shut down (as it was for much of the third quarter)? Why renovate a kitchen if you can’t afford a house to begin with?

Such problems don’t have to begin with Home Depot to affect Home Depot. And accordingly, the retailer lowered its full-year guidance to suggest slower earnings, yet more pressure in the fourth quarter, and no clear rebound in sight. Until mortgage rates fall lower or prices find a more affordable floor, the housing market — and its bright-orange bellwether — will probably just keep moving sideways.

Or perhaps slightly down. Wall Street can't have been surprised by Home Depot's news, but you wouldn't expect traders to be pleased, either. In keeping, shares fell about 4% before Tuesday's market open, and remain down about 8% year to date.