Stocks

The Housing Market's Promising Recovery: Three Compelling Reasons to Invest in Home Depot Stock

Published October 26, 2024

The housing market is positioned for a significant recovery.

Home Depot (HD) stands out as one of the top-performing stocks in history, still holding strong competitive advantages today.

As the largest player in the vast home improvement retail sector, which boasts a nearly $1 trillion market, Home Depot operates in a near-duopoly with its main competitor, Lowe's. This situation enables both companies to achieve healthy operating margins and solid returns on investments.

Although Home Depot has faced challenges since the peak of the pandemic—largely due to a sluggish housing market—the potential for growth is apparent in the upcoming years. The housing sector is expected to recover, making this an ideal moment to consider buying the stock. Here are three compelling reasons to invest in Home Depot right now.

1. Anticipated Housing Recovery

Following the housing boom driven by the pandemic, rising interest rates caused home sales to drop sharply, impacting Home Depot's business path.

However, with the Federal Reserve beginning to lower interest rates—recently announcing a 50-basis-point cut—there is optimism on the horizon. Although mortgage rates have yet to respond, predictions suggest they will decrease further, with anticipated cuts totaling 1.5 percentage points by the end of next year.

Currently, the existing home sales are about 30% lower than pre-pandemic levels, indicating significant room for growth in the housing sector. As home sales begin to recover, it is expected that Home Depot will experience accelerated growth alongside.

Moreover, the U.S. is facing a housing shortage estimated in the millions. Both presidential candidates have expressed intentions to address this issue, which could further enhance Home Depot's prospects as supply and demand stabilize.

2. Record High Home Equity Levels

While sales of homes have slowed, property values continue to rise. Many Americans are choosing to remain in their homes longer, which has led to unprecedented levels of home equity. Currently, U.S. homeowners have accumulated over $32 trillion in equity, and as lending rates for home-equity loans and lines of credit decrease, accessing that wealth will become easier.

The average homeowner now possesses roughly $214,000 in equity, providing a potential boost to home improvement spending. In addition, the stock market is at an all-time high, serving as an additional funding resource for these projects.

These factors combined should help stimulate both a housing recovery and a subsequent rise in Home Depot stock.

3. Strong Competitive Edge

Despite recent declines—most notably, comparable sales dropping by 3.3% in its fiscal second quarter—Home Depot remains resilient. The company expects a comparable sales decline of about 3% to 4% for the entire year.

Even in light of these challenges, Home Depot's profit margins remain robust, with expectations for operating margins in the range of 13.5% to 13.6% for fiscal 2024. Although this is a decrease from previous highs, the company is well-prepared to enhance profitability during the expected recovery phase.

This financial stability should reassure investors of Home Depot's ability to navigate any future obstacles within the market.

Final Thoughts: Why Home Depot Stands Out

Home Depot's current price-to-earnings ratio of 27 may not seem appealing at first glance, yet the business has considerable leverage that could be realized once it resumes growth. Furthermore, its acquisition of SRS Distribution is anticipated to yield positive outcomes, helping Home Depot better serve the professional market.

Home Depot is a trusted player with a significant economic advantage, poised to benefit from the housing recovery and initiatives to alleviate the housing shortage in the United States.

housing, recovery, investment