Home Depot's reduced guidance for 2020 is bad news for the U.S. housing market that has been on a roll so far in 2019.
Several signs of a U.S. housing market crash have emerged over the past few months, and home improvement retailer Home Depot (NYSE:HD) is now raising yet another red flag that the bulls shouldn’t miss.
Home Depot’s 2020 sales forecast doesn’t just miss analysts’ expectations; it is also a downgrade over what the company was originally anticipating. In 2017, the home improvement retailer said it anticipated revenue between $115 billion and $120 billion in 2020. But it now sees only $114.4 billion in revenue, missing the lower end of the original forecast.
Quite clearly, Home Depot doesn’t seem enthusiastic about the prospects of the housing market for 2020.
Home Depot’S stock has been flying high this year. Shares of the company have gained over 23% so far in 2019, but it could end the year on a bad note as CEO Craig Menear seems unsure about the health of U.S. housing. The Wall Street Journal quotes him as saying:
The company’s 2020 forecast reflects slower growth in gross domestic product and a housing market that is positive but “not at a level that we’ve seen in prior years,” Chief Executive Craig Menear told investors on Wednesday.
The U.S. housing market in general and Home Depot in particular have been riding high in recent years on account of low unemployment and affordable interest rates. But the company’s 2020 forecast is an indication that the good times could now be over and the U.S. housing market bubble might burst soon.
There is an acute shortage of homes in the U.S. According to data from Realtor.com, the inventory of entry-level homes that are priced below $200,000 witnessed a sharp annual drop of 16.5% last month. This was much more severe than October’s annual drop of 15.2%.
What’s more, the U.S. housing market is also witnessing a shortage of mid-tier homes. The inventory of homes priced between $200,000 and $750,000 was down 7.4% annually in November following October’s 4.3% drop. Inventory shortages are also seen in the high-end market.
In all, the U.S. housing market is suffering from a lack of supply. This could prove to be its undoing next year as buyers are likely to be priced out of the market if mortgage rates continue to tick up. Americans are already under duress, as evident from four straight months of declining consumer confidence.
Lynn Franco, the Senior Director of Economic Indicators at The Conference Board, remarked last month:
Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions.
Meanwhile, the U.S.-China trade war continues to rage on as a fresh round of tariffs is all set to go into force later this month. If such a thing happens, Americans could be forced to pay more money for items such as smartphones, laptops and other electronics. This will lead to higher expenses and lower savings, and if interest rates also rise, housing affordability will go out of the window.
It is not surprising to see why Home Depot is wary of the U.S. housing market’s prospects next year. There are not enough homes available for sale and that’s leading to higher prices. Consumer confidence is also low and there’s a chance that it could weaken as employment growth over the past year has waned.
Private sector employment in the U.S. had increased by only 67,000 in November, which was well below the estimate of 156,000 new jobs. This was much lower than the government’s official nonfarm payrolls report, but it suggests weakness in private-sector job creation.
If consumers can’t come up with the money to buy new houses and mortgage rates go up, sales will decline and builders would be forced to lower prices to offload the limited inventories they have. That would trigger a U.S. housing market crash in 2020.
Last modified: September 23, 2020 1:23 PM