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Home Depot, Lowe's stock downgraded on housing headwinds

Analysts at the Telsey Advisory Group downgraded Lowe’s and Home Depot stock amid a housing market that is weakened by falling home sales and mortgage increases.

Analysts at the Telsey Advisory Group downgraded Lowe’s and Home Depot stock on Tuesday amid a housing market weakened by falling home sales and mortgage increases.

The New York-based financial planner and brokerage firm said existing home sales have declined for several quarters, because of a rapid increase in the 30-year mortgage rate, limited inventory and lower affordability, indicating a bottoming for the housing market.

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Meanwhile, the U.S. Federal Reserve may not be done raising interest rates to cool economic inflation, suggesting relief from lower mortgage rates may not come soon. 

Analysts at Tesley subsequently demoted the two home improvement stocks from Outperform to Market Perform, while noting other key drivers for the decision included a lag in home improvement sales, combined with overlapping issues stemming from the pandemic and government stimulus. Joseph Feldman, a senior research analyst at Telsey told Seeking Alpha News, "Importantly, home prices, which is a key driver of home improvement sales, have worsened… with further declines expected."

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In the near term, analysts said they expect Lowe's and Home Depot to experience a slightly steeper slowdown related to the weak housing market trends.

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Analysts also said consumers have remained cautious with spending, especially on big ticket items and projects, while continued normalization from the strong COVID-19 and government stimulus related gains from the past three years resulted in lower second quarter 2023 and annual financial estimates.

Although Lowe's should remain a share gainer and benefit in the long term from enhancing digital, improving installation services while driving localization and elevating the assortment, "we are moving to the sidelines for now," analysts said in the note. 

The Tesley Group said Home Depot would also remain a share gainer for the long term but recommended investors sit out in the shorter term despite the company’s "best-in-class execution and number of initiatives, merchandising, e-commerce and supply chain," the analysts added. 

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