A new analyst call on Home Depot reflects our feeling on what to do with
Melius Research appears to be aligned with our idea that now is the time to hold your nose and do some buying in this market — at least as it relates to some beaten-down names tied to housing. That’s the message in a Tuesday note from analysts at Melius who initiated coverage on the housing sector — putting a buy rating and a $397-per-share price target on Home Depot . They are among the 58% of Wall Street shops with buy ratings; 38% have holds; and the rest are sells, according to FactSet. The Club put a buy-equivalent 1 rating on the stock after earnings this summer . The Melius analysts pin their optimism on the idea that things are set to improve in the existing home market, which is where the demand for repairs and remodeling projects tends to come from. That’s why they like Lowe’s , too. “We view existing home supply’s rise as perhaps the most consequential trend for the housing ecosystem, more so than most of the current demand headwinds,” Melius wrote. The headwinds, as Melius sees it, are more in the new housing market due to not only a high-interest rate environment that is crushing monthly affordability, but also a slower job market. It’s not surprising that consumer confidence remains low as people are wary of taking on large, multi-decade financial commitments. In fact, the analysts said that job growth and consumer confidence are “largely viewed as two of the three most critical demand drivers for housing (rates being the third).” While they like homebuilder Toll Brothers, the analysts rate D.R. Horton , KB Home , and Lennar as sells. In recent years, a major factor stalling the real estate market and keeping existing home supply suppressed has been the “lock-in” effect. This happens when existing homeowners, who may want to move, choose not to because the rate on their existing mortgages is so much more attractive than what they could get in the current mortgage market. Sure, you may have bought a house in 2020 at $750,000 and now want to sell at $1 million and move, but do you really want to give up that sub-3% mortgage rate in exchange for 7%? All else equal, going from 3% to 7% on a 30-year fixed mortgage increases your principal plus interest payment by about 58% each month. We’ve been waiting for about two years for mortgage rates to fall below 6% and stay down there. While it’s been a wrong call, we’re holding a small position in Home Depot to be ready for when rates eventually fall. Additionally, over the past couple of tough years, the company has been buying building distributors left and right, getting bigger in pro for when the housing turn comes. That said, maybe lower rates aren’t the only way to get the existing home market going again. The “lock-in” effect is abating. “Specifically, 50% of homeowners are now in sub-4% mortgages vs. 61% three years ago, while 22% have 6%+ mortgages vs. 10% three years ago,” the Melius analysts said. “We expect this trend to continue over at least the next 2-3 years and drive a…
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