Home Depot warns consumers are cutting back amid economic uncertainty

Americans are putting off major upgrades to their homes as they await lower interest rates and amid ongoing unease about the U.S. economy, Home Depot said Tuesday. The company lowered its sales expectations for the year, blaming weaker consumer spending.

The company now forecasts 2024 sales at its locations open at least a year to fall between 3% and 4%. Its prior outlook called for a drop of roughly 1%.

Home Depot joins other major corporations that have cautioned about a pullback in consumer spending, with the likes of McDonald's and Starbucks also reporting inflation-weary Americans are getting choosier in where they spend their dollars. On Tuesday, the home improvement chain said high interest rates are also taking a toll, as some people are holding off on purchasing homes or embarking on large renovation projects.

"Interest rate decisions matter more to Home Depot than they do to an average retailer, if only because a large chunk of home improvement demand is tied to the housing market. High interest rates have, and still are, acting as a brake on house moves," commented Neil Saunders, managing director of GlobalData, in a Tuesday research note.

The nation's largest home improvement retailer posted a small quarterly sales increase, but that was due to its acquisition of a contract supplier that caters to professionals including roofers and landscapers, Global Data's Saunders noted. "The occasion is not worth cracking open the champagne for," he added.

Consumers' rate expectations

Home Depot CEO Ted Decker blamed high interest rates and economic uncertainty for causing consumers to grow more cautious.

"During the quarter, higher interest rates and greater macro-economic uncertainty pressured consumer demand more broadly, resulting in weaker spend across home improvement projects," Decker said in a news release .

On an analyst call, Decker added, "Additionally, we saw continued softness in spring projects, which were also impacted by the extreme weather changes throughout the quarter."

With higher interest rates pushing turnover in the housing market towards 40-year lows, people are less interested in financing bigger renovations, Decker said, adding, "Everyone's expecting rates are going to fall. So we're deferring those projects."

Still, Decker and other Home Depot execs stressed that fundamentals remain strong and its base is on solid footing.

"Our consumer, in particular, remains quite healthy," the CEO stated during Tuesday's call. "These are consumers who have seen their home values go up 50% in the last 4 years, their home equity has increased almost 70% since right before the pandemic," Decker said, adding: "Equity values have been strong, jobs are strong, earnings are strong."

One potential silver lining, according to Saunders, is when rates do come down, it could lead to a small spike in home moving, which would be helpful to the retailer's bottom line.

"But as is suggested by the guidance provided by Home Depot, the overall impact on annual sales will be somewhat muted because the cuts have come so late in the year," he added.

Mortgage rates earlier this month tumbled to their lowest since April 2023, offering hope to house hunters priced out of the market given high borrowing costs and home prices that reached a record in June . Still, the current rate on the 30-year fixed loan stands at about 6.5%, or more than double the sub-3% rates available in 2020 and 2021.

Wall Street analysts currently expect an interest rate cut from the Federal Reserve at its September meeting.