"The U.S. housing recovery continues to track in line with our expectations with home price appreciation and housing turnover being the drivers of growth for our business."
- Craig Menear, CEO of Home Depot
Why is price appreciation and housing turnover so important for home-related stocks? I detailed why housing turnover is important in a previous post. I'll go into the reasons why home prices have a halo effect on housing purchases here.
First, the logic. When home prices go up, people generally feel better about their home. They view it as more valuable, and they are more likely to maintain and improve on it. Large investments such as floor remodels are also viewed as more likely to generate a positive return. The net result is that you get people purchasing things like hardwood flooring (think Lumber Liquidator), new drapes (think Bed Bath and Beyond), a new couch (think Ethan Allen), new kitchen flatware (think Williams Sonoma), or a new layer of paint (think Home Depot or Lowes). You can get other effects as well, such as increased home sales (and in turn home turnover), or people increasingly using their home equity to take out loans. Either way, you get increased home spending.
Next, the evidence. As usual, I'll compare home price fluctuations to Home Depot comps. The correlation is pretty strong.
So what do recent movements in home prices tell us? Home price appreciation has been strongly positive for the last several years, growing at 10% or higher for 13 out of 16 months. In recent months, that growth has slowed, but it's still strongly positive at about 6% in 2014. It would be unreasonable to expect home prices to continue to boost sales as strongly as it has in the past, but it looks like it will continue to be a tailwind for home-related companies in the future.