Wall Street is not the only entity keeping a close eye on the Federal Reserve’s next move; Home Depot is also paying attention. The Chief Financial Officer of Home Depot, Richard McPhail, revealed in an interview with CNBC that homeowners have been delaying moving into new houses or starting major projects that require financing due to the higher interest rates. This waiting game has become more intense with the prospect of an interest rate cut on the horizon. McPhail explains that customers are hesitant to borrow and finance projects now when they believe that interest rates will be lower in the next three to six months.
CEO Ted Decker further elaborated on this issue during an earnings call, stating that many homeowners are facing a “golden handcuffs dynamic.” These homeowners have mortgages with historically low interest rates, as low as 3%, and are reluctant to move, as doing so would lock them into a higher rate. An interest rate cut could potentially incentivize these homeowners to proceed with their projects and drive sales for Home Depot, which has experienced a slowdown in recent times.
Although Home Depot exceeded analysts’ expectations for quarterly earnings and revenue, the company provided a disappointing full-year forecast. It anticipates a drop in comparable sales of 3% to 4%, a deeper fall than the previously anticipated 1% decline. The possibility of an interest rate cut by the Federal Reserve offers a glimmer of hope for Home Depot.
The Federal Reserve has hinted at the likelihood of an interest rate cut in the near future. Fed Chair Jerome Powell stated in late July that central bankers could reduce rates at their next meeting in September if the economic data supports such a decision. Recent data showing that the producer price index, which measures wholesale prices, rose only 0.1% in July, lower than economists’ expectations, indicates a positive trend.
Ted Decker acknowledged the difficulty in determining the exact interest rate that would significantly impact Home Depot’s business positively. However, he noted that when mortgage rates dropped last year, the company observed an immediate increase in housing activity, including mortgage applications and refinancing applications. Decker believes that if mortgage rates were to drop to around 6.5%, it would likely encourage more engagement from customers.
While mortgage rates have been fluctuating, they have recently been closer to that level. According to Mortgage News Daily, the average rate on a 30-year fixed mortgage declined to 6.4% earlier this month, the lowest rate since April 2023. However, it remains uncertain whether consumer uncertainty will continue to hinder Home Depot’s sales, even with lower mortgage rates.
Home Depot’s leaders attribute some of the weaker sales to a growing sense of caution among customers. Despite the majority of customers being homeowners who have witnessed significant home equity gains, they have become more concerned about the macroeconomy. Factors such as political and geopolitical uncertainties, an increase in unemployment, and inflation eroding disposable income have caused customers to pause their projects. Even with an interest rate cut, Decker believes that customers may still hesitate until these issues are resolved.
In conclusion, Home Depot is closely monitoring the Federal Reserve’s potential interest rate cut as it seeks to address the slowdown in sales. Homeowners’ reluctance to borrow and finance projects due to higher interest rates has impacted the company. However, the prospect of lower interest rates could incentivize homeowners to proceed with their projects, boosting Home Depot’s sales. While uncertainty in the macroeconomy has contributed to weaker sales, an interest rate cut may not immediately resolve these concerns.
