Wednesday, November 17, 2010

The Home Depot Effect

While it is important to look at housing numbers such as new home sales, existing home sales, mortgage applications, building permits, etc., when trying to predict the future of the real estate market, many ancillary factors are also strong indicators of market trends.

Home Depot, which just reported third quarter results, is a prime example. The following is an excerpt from a Marketwatch article dated 11/16/10:

Home Depot Chief Executive Frank Blake said more than 80% of the company's top 40 markets in the U.S. posted positive comparable sales...
"From an overall perspective, we see a stabilizing business," Blake said on a conference call with analysts.
Still, like Lowe's, the company said there's still "continued pressure" in the market. Average transaction size is down as customers continued to spend on smaller ticket items and basic maintenance and repair projects. Sales of items under $50, about one-fifth of Home Depot's business, were up 2.7%. Those above $900, also 20% of the total, fell 3.4%, with building materials and non-essential spending such as kitchen areas remaining weak.

What this means for you in your local market is open for your interpretation. My thought is that the above is indicative of what I have witnessed over the last few months.

People are doing what they can in order to keep their homes functional, but remain averse to making large expenditures given the tenuous state of the economy. This suggests that foreclosures may abate slightly. (People spend virtually no money on homes they intend to walk away from.) However, most homes require moderate to significant improvements prior to sale in order to maximize return. The net effect is that, until stores like Home Depot see average sale prices increasing dramatically, home prices will remain at current levels. The good news for buyers is that, for those of you looking to create value though sweat equity, opportunities abound.

As an aside, Warren Buffet recently reported that, in the third quarter of this year, he sold all of Berkshire Hathaway's shares in Home Depot...