Business

Lowe’s and Home Depot are faring well even as the housing market is going through a rough patch.
Homeowners are still spending on renovations, as home equity remains at high levels.
This comes as home sales, prices and construction are all weakening due to a massive jump in mortgage rates.

A home improvement contractor works on a house in Cambridge, Massachusetts.
Suzanne Kreiter | The Boston Globe | Getty Images

As the U.S. housing market falls hard from its pandemic-driven highs, home improvement retailers like Home Depot and Lowe’s don’t seem to be feeling the same pain. In fact, they’re faring better than expected.
While homebuilding and home remodeling are integrally connected, the market forces behind each can be different, and that’s what’s happening now.

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Home Depot and Lowe’s reported strong quarterly earnings Tuesday and Wednesday, respectively. Lowe’s stock rose 3% Wednesday. Executives at both companies spoke bullishly about the prospects for their business in 2023. This comes as home sales, prices and construction are all weakening significantly due to a massive jump in mortgage rates.

Home Depot financial chief Richard McPhail pointed to an “improve in place” mentality among current homeowners, who might have wanted to sell but changed their minds because they could no longer command top dollar.
“All we can do at this point is repeat what our customers are telling us,” McPhail said. “There is a dynamic we don’t see much in the market. With rising mortgage rates, homeowners are staying in place.”

With rising mortgage rates, homeowners are staying in place.

Richard McPhail
Home Depot CFO

Home prices are still 11.4% higher in October than they were in October 2021, according to CoreLogic, but that annual comparison has been shrinking for several months. Prices are falling month-to-month at a far faster pace than normal seasonal trends.
Still, the unprecedented run-up in home prices during the first years of the pandemic, fueled by record low mortgage rates and a desire for many Americans to move to larger homes in suburban areas, gave homeowners sizeable amounts of equity. Prices jumped more than 40% in just two years.

By the end of the first quarter of this year, before the steep runup in mortgage rates caused the housing market to falter, homeowners had a collective $11 trillion dollars in so-called tappable equity, according to Black Knight. That is the amount a borrower can take out of their home while still leaving 20% equity in it. That equity grew by an unprecedented $1.2 trillion in the first quarter of this year alone. Per homeowner, it amounts to roughly $207,000 in tappable equity.
That equity is part of a three-pronged driver of home improvement, according to the CEO of Lowe’s, Marvin Ellison. He pointed to home price appreciation, the age of the U.S. housing stock — which is roughly 40 years old, the oldest since World War II — as well as high levels of personal disposable income.
“So when you look at all those factors, those things bode well for home improvement, and we feel really good about our current trends,” said Ellison in an interview Wednesday on CNBC’s “Squawk Box.”

Building vs. remodeling

Homebuilders, some of whom work in both home construction and home renovation, don’t feel quite so bullish on their market. Builder sentiment dropped in November for the eleventh straight month, hitting the lowest level in a decade, according to the National Association of Home Builders.
The NAHB, however, is forecasting that the remodeling sector will fare the best among the residential construction submarkets during this current housing contraction.
“The growth rate for improvement spending will slow due to declines for existing home sales,” said Robert Dietz, NAHB’s chief economist. “However, an aging housing stock, work from home trends and a decline for household mobility all favor remodeling spending.”
Dietz also points to the “interest rate lock-in effects,” meaning people don’t want to sell a home where they might be paying a 2.75% mortgage interest rate and trade up to another home where the rate would likely be around 7% today.
Harvard’s Joint Center for Housing predicts that the annual gains in home improvement and maintenance spending will decline “sharply” by the middle of next year, but only to a 6.5% growth rate from an unusually high 16% rate.

“Housing and remodeling markets are undoubtedly slowing from the exceptionally high and unsustainable growth rates that followed in the wake of the pandemic-induced recession,” says Carlos Martín, project director of the Remodeling Futures Program at the Center. “Spending for home improvements will continue to face headwinds from declining home sales, rising interest rates and the increasing costs of contractor labor and building materials.” 
Despite inflation in just about everything in the economy, consumers do seem to want to spend more on their homes. Both Lowe’s and Home Depot showed a drop in the number of sales but a jump in the dollar amount of those sales. That led to their increases in revenue.
“There is inflation in the market and elasticity, but not to the degree that we anticipated, and the customer shows us they are resilient,” said Home Depot’s McPhail.
A recent survey of nearly 4,000 homeowners by Houzz, a home improvement and design website, found that only 1% of homeowners reported having canceled a home improvement project in 2022. Meanwhile, 37% completed a project in 2022 and nearly one-quarter said they were planning to start a home improvement project in the next 12 months.
“Additionally, more than half of the homeowners we surveyed have no intention of selling or moving out of their current residences in the next 20 years or ever,” said Marine Sargsyan, Houzz staff economist.

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An EY report found that 40% of surveyed companies have or plan to have a four-day workweek.
Of the employers surveyed, 70% have adopted a hybrid approach.
Fifty-eight percent of surveyed executives plan to improve or expand their commercial real estate portfolios.

A man walks on Wall St. during the morning commute, as the city deals with record temperatures and the excessive heat, in New York, July 20, 2022.
Brendan McDermid | Reuters

A cooling economy, rising mortgage rates and mass layoffs have done little to dampen executive demand for expanded office presence and increased flexibility for office workers, a new report from Ernst and Young found. 
The consulting firm on Wednesday released its second annual EY Future Workplace Index, which showed a growing appetite for hybrid work and an increase in both the use of flexible working options and the presence of a four-day workweek.

Forty percent of companies surveyed either have implemented or have begun to implement a four-day workweek, EY said in a press release, an approach that has gained popularity abroad but has seen little adoption in the U.S. until recently.
Hybrid work showed a marked uptick from 2021, the survey showed, with 70% of employers surveyed adopting a hybrid approach, which has employees working from home two to three days a week.
The four-day workweek and the growth of a hybrid workforce are both parts of what EY said is a shifting landscape in real estate management for corporate leaders. “The economic downturn will force leaders to make important decisions regarding their real estate portfolios — from investments, to space optimization, to workforce models,” EY partner Mark Grinis said in the press release.
Executives continue to invest in improving employee quality of life, according to EY. Forty-six percent of surveyed employers plan to introduce in-office baristas. A third of surveyed executives plan to implement or extend their childcare options for employees. These changes come after the Covid-19 pandemic bruised employees and drove an uptick in resignations across sectors. The EY survey found that surveyed companies have begun to invest in in-office amenities to boost return-to-office rates and employee retention.
The EY report comes amid mass layoffs in all industries, but especially in tech, where skilled employees enjoyed expansive perks and office amenities. Meta, Amazon and Twitter have all announced reducing headcount by the thousands. At Google parent company Alphabet, even with a hiring slowdown in place, an activist investor is demanding CEO Sundar Pichai cut Google’s headcount and employee expenses.

According to the EY survey, however, only a third of surveyed executives plan to reduce investment in commercial real estate. Over half of those surveyed plan to improve or expand their existing portfolios. 
Elon Musk, on the other hand, shows no sign of following the executives EY surveyed. Decrying Twitter’s catering expense — which he claimed was $13 million annually in San Francisco alone — the new Twitter chief has yanked free lunches and told employees that they must return to the office.

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ECB Vice President Luis de Guindos told CNBC the central bank needed to keep inflation expectations anchored.
In a report published Wednesday, the ECB said households and businesses were under pressure from high rates, a poor economic outlook and monetary tightening; but government support needed to be “targeted.”
De Guindos said there needed to be “cautious” quantitative tightening and downplayed the risks of a new European debt crisis.

It is crucial for the European Central Bank to convey its commitment to bringing prices down in order to keep inflation expectations anchored, according to its vice president.
Luis de Guindos told CNBC’s Annette Weisbach on Wednesday that the main risk of a wage-price spiral was the perception that the central bank’s credibility was not strong enough.

“That’s why we are making such a commitment with price stability … and that we will do whatever is necessary in order to reduce inflation to the level that we consider as price stability, which is 2%,” he said.
Wages have been rising in the euro zone, but were not yet doing so at a rate that was “excessive,” de Guindos said.
But, he added, the lesson from the stagflation seen in the 1970s was that monetary policy needed to be focused on avoiding second-round effects.
Euro zone inflation is running at 10.7%, the highest level in the bloc’s history, and the ECB has hiked its benchmark rate to 1.5%, a level not seen since 2009, before the sovereign debt crisis.
De Guindos said he could not specify what the ECB’s terminal rate would be, even though markets were “demanding guidance,” but the central bank had to “say very clearly that we are going to do our job, that we will reduce inflation, and that we will raise rates to the level that is compatible with the convergence of inflation to our price stability definition.”

The ECB on Wednesday published a Financial Stability Review which outlined challenges facing businesses and households from the poor economic outlook, high inflation and monetary tightening.
It argues governments need to provide vulnerable sectors with targeted support without interfering with the normalization of monetary policy.
Economists predict the euro zone is heading for a deep recession amid plunging consumer confidence.
De Guindos said banks needed to be “cautious and prudent,” avoid being blinded by a short-term increase in profitability due to higher interest rates, and prepare for the potential coming rise in insolvencies and the reduced repayment capacity of households.
The tight labor market, with unemployment at an all-time low, was a “positive factor” — but not guaranteed to continue in the future, he continued.
However, he downplayed risks of the kind of fragmentation in the euro area that could be an early indicator of another debt crisis, noting spreads between sovereign bonds had not been widening significantly in recent months and that the ECB had new anti-fragmentation instruments ready to deploy.
He also said euro zone countries had not seen the “kind of accidents we saw in the U.K. with the mini-budget,” and he hoped they would not.
A swath of unfunded tax cuts and growth-supportive measures announced by the U.K.’s short-serving prime minister Liz Truss, which came as the Bank of England was raising interest rates and set to begin bond selling, caused havoc in the gilt market and nearly caused pension funds to collapse.

On quantitative tightening, de Guindos told CNBC, “My personal view is that we have to be careful. It has to take place, it has to be part of the normalization process of monetary policy, but simultaneously, given the level of unknowns with respect to the potential consequences of QT, I think that we have to do it very carefully.
“It should be a sort of passive QT, and trying to reinvest only a percentage of the maturities of the bonds that we have in our portfolio in different time horizons.”

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JetBlue Airways plans to launch flights from New York to Paris next summer.
JetBlue says service will start from its John F. Kennedy International Airport base.
Tickets will go on sale “in the coming months.”

A JetBlue Airways Corp. Airbus A321 plane sits at a gate outside of Terminal 5 at John F. Kennedy International Airport (JFK) in New York, U.S., on Wednesday, July 12, 2017. Jetblue Airways Corp. is scheduled to release earnings figures on July 25. Photographer: Mark Kauzlarich/Bloomberg via Getty Images
Mark Kauzlarich | Bloomberg | Getty Images

JetBlue Airways plans to launch flights from New York to Paris next summer, a trans-Atlantic expansion it contends will bring down prices on routes dominated by large carriers.
Tickets will go on sale “in the coming months” for flights between its hub at New York’s John F. Kennedy International Airport and Paris’ Charles de Gaulle Airport, JetBlue said Wednesday. It plans to add flights from Boston to Paris later.

JetBlue began flights to London from New York in summer 2021, more than two years after it first announced its plans. The carrier later added service from its Boston hub. JetBlue had said it would announce a second destination across the Atlantic Ocean this year.
“JetBlue is offering something completely unique to what you get from the big global legacy airlines on these routes,” CEO Robin Hayes said in a company announcement, referring to large carriers like Delta Air Lines, its partner Air France, and others like United Airlines and American Airlines, which is also in an alliance with JetBlue in the Northeast U.S.
Those airlines account for about 88% of the seats between New York-area airports and Paris’ airports from June to August 2023, according to consulting firm ICF.
JetBlue plans to use Airbus A321LR planes on the routes, a long-range version of the narrow-body jetliners.
The New York-based airline also has a deal to acquire Spirit Airlines, which regulators haven’t yet approved.

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Of the index’s three components, current sales conditions fell 6 points to 39, and sales expectations in the next six months dropped 4 points to 31. Buyer traffic declined 5 points to 20.
The drop in November is the 11th straight monthly decline and the lowest level since June 2012, with the exception of a brief fall at the start of the Covid-19 pandemic.

Contractors work on concrete slabs in the Cielo at Sand Creek by Century Communities housing development in Antioch, California, on Thursday, March 31, 2022.
David Paul Morris | Bloomberg | Getty Images

Homebuilder sentiment in the single-family housing market fell to the lowest level in a decade in November, as builders continue to struggle with higher costs for labor and materials and lower demand from homebuyers.
A monthly sentiment index from the National Association of Home Builders dropped 5 points from October to 33. That is the 11th straight monthly decline and the lowest level since June 2012, with the exception of a very brief drop at the start of the Covid-19 pandemic that was followed by a strong rebound.

A year ago, builder sentiment stood at 83.
Of the index’s three components, current sales conditions fell 6 points to 39, and sales expectations for the next six months dropped 4 points to 31. Buyer traffic slid 5 points to 20.
“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” said NAHB Chairman Jerry Konter, a homebuilder and developer from Savannah, Georgia.
In the face of mortgage rates that are more than twice what they were at the start of this year, builders are having to offer potential buyers better deals. The NAHB said 59% of builders reported using incentives, a significant increase from September to November.
In November, 25% of builders reported paying points for buyers, up from 13% in September. Mortgage rate buy-downs rose to 27% from 19% during that same time.

In addition 37% of builders cut prices in November, up from 26% in September, with an average price of reduction of 6%. However, the price cuts are only about half of what builders offered in 2008 during the housing crash and Great Recession.
“Even as home prices moderate, building costs, labor and materials − particularly for concrete − have yet to follow,” said Robert Dietz, NAHB’s chief economist.
Regionally, on a three-month moving average, builder sentiment in the Northeast fell 6 points to 41. In the Midwest, it slipped 2 points to 38. In the South, it fell 7 points to 42 and declined 5 points to 29 in the West.

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Target is cutting its fourth-quarter outlook, after seeing sales slow in late October.
The big-box retailer saw sales decline as families contended with higher prices, making trade-offs between what they need and what they want.
It plans to cut up to $3 billion in total costs over the next three years.

A sign outside of a Target department store on June 07, 2022 in Miami, Florida. Target announced that it expects profits will take a short-term hit, as it marks down unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.
Joe Raedle | Getty Images

Target’s profit fell by around 50% in its fiscal third quarter as it cleared through unwanted inventory and sales slowed heading into the holidays, prompting the company to lower its expectations for retailers’ most important time of year.
The company also said Wednesday it plans to cut up to $3 billion in total costs over the next three years, citing the need to become more efficient after two years of dramatic sales gains. The retailer’s revenue has grown by about 40% during the Covid pandemic.

Target did not specify how it will reach its savings goal, but said it does not have plans for layoffs or a hiring freeze. 
Here’s how Target did for the three-month period ended Oct. 29, compared with Refinitiv consensus estimates:

Earnings per share: $1.54 vs. $2.13 expected
Revenue: $26.52 billion vs. $26.38 billion expected

The company’s shares were down more than 14% in premarket trading. The stock closed about 4% higher Tuesday after rival Walmart posted a positive earnings report. Target’s shares were down more than 22% this year and its market value was about $83.38 billion.
Target saw sales decline as families contended with higher prices, making trade-offs between what they need and what they want – a potential warning sign for the holiday shopping season. Target Chief Growth Officer Christina Hennington said customers’ price sensitivity intensified during the last two weeks of October. 
“It was a precipitous decline and, frankly, we’ve seen those trends in the early part of November as well,” she said on a call with reporters.

The inflation factor

Target echoed many of the same themes as its competitor Walmart. Consumers are feeling strained by higher prices for groceries, housing and other necessities. They are buying fewer full-priced items and holding out for promotions instead. To stretch their dollars, they are choosing smaller items, value packs or the retailers’ own, less-expensive brands. 
People are spending less on discretionary merchandise, too. Walmart on Tuesday also spoke of a pullback in spending on apparel, electronics and similar items. But the discounter beat Wall Street’s expectations as it attracted shoppers with its low-priced groceries.
Big bargains have returned across the retail industry after years of lower inventory and out-of-stocks, a dynamic that is also hitting companies’ bottom lines, including Target’s. The company said Wednesday it now plans for a weaker holiday quarter. It expects a low single-digit decline in comparable sales in the three-month period and an operating margin rate around 3%.
Target did not provide an outlook beyond the holiday quarter, but said it expects tough conditions to persist. 
“As we look ahead, we expect the challenging environment to linger beyond the holiday season and into 2023,” Chief Financial Officer Michael Fiddelke said on the call with reporters. 
The retailer made progress in clearing through much of its excess merchandise. Its inventory was up about 14% year over year compared with 36% in the second quarter and 43% in the first quarter. Yet getting rid of those goods hurt its profits. Target’s net income in the third quarter fell by about half – to $712 million, or $1.54 a share, from $1.49 billion, or $3.04 per share, a year earlier.
It also missed its goal of healthier operating margins in the back half of the year. It had promised an operating margin rate of around 6% when it cut its profit outlook for the second time. In the third quarter, its operating margin rate was 3.9%.
Target had higher-than-expected markdowns, especially in the final weeks of the quarter, Fiddelke said. It also spent more to manage inventory that arrived early as the supply chain backlog eased, he said.
He also said Target is seeing a higher level of shoplifting — which has jumped about 50% year over year. So far this fiscal year, those losses have had a more than $400 million impact on Target’s operating margin. Most of that has come from organized retail theft.

Silver linings

Target’s quarter had bright spots. The company gained market share across all five of its key merchandise categories when looking at the volume of items sold. At stores and on its website, traffic grew by 1.4% and average tickets rose by 1.3% compared with the year-ago quarter. It also had record sales volumes for back to school, back to college and Halloween.
Comparable sales, which track Target sales online and at stores open at least 13 months, rose 2.7% over the year-ago period. That topped Wall Street’s expectations of 2.2% growth, according to StreetAccount.
The company’s own brands, which are typically less expensive than national brands, grew at double the rate of its total business in terms of dollar sales, Hennington said. 
Food and beverage was one of Target’s strongest sales categories, with comparable sales growing by low double digits. Essentials grew in the low single digits, fueled by sales of pet and health items. Beauty had comparable sales growth in the midteens.
On the other hand, sales slowed in other categories – especially home, sporting goods and toys, said Hennington, the chief growth officer.

Costs and Christmas

On the call with reporters, CEO Brian Cornell said Target is still looking for ways to use its scale to become more efficient. For example, it has opened a new kind of delivery hub to sort packages and get online purchases to shoppers more quickly and cheaply.
Fiddelke said the company will continue to invest in its workforce, but said “expense management is critically important.”
“That kind of discipline will ensure we grow in a variety of economic conditions, and set our company apart in the near and long term,” he said.
Target will share more details about its cost-cutting plan at an annual investor day, which is scheduled for March.
Despite the lower guidance, the company still expects eager holiday shoppers, Hennington said. Target has expanded the number of stores with Disney shops and struck new partnerships, such as carrying items from nostalgic toy brand FAO Schwarz.
And, she added, it will have budget-friendly gift items, too – including $3 Christmas ornaments and $5 candle assortments.

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Amtrak’s Acela is the fastest passenger train in the Western Hemisphere, but tickets can be pricey.
Amtrak fares can vary dramatically in the Northeast, home of the most heavily used stretch of track in the railroad’s nationwide network, which also includes stops in Canada.

But tickets are often more expensive than plane tickets, despite flight times being much shorter than the typical train ride. Transportation researchers say Amtrak’s fares in the Northeast are higher than those for comparable systems.
Meanwhile, the federally owned and funded Amtrak has not made money in its five-decade history.
Ridership numbers and finances were strengthening before the coronavirus pandemic. A former executive said that in early 2020 the company was on its way to its first profitable year in its history. The pandemic tanked ridership and dashed those hopes.
But now Amtrak has reasons to be bullish about its future. In November 2021 the federal government allotted Amtrak $66 billion to upgrade equipment and repair and expand its network. Amtrak wants to increase ridership by 20 million annually, and expand into areas around the country with fast-growing populations but little passenger rail service. States such as Texas, Florida and Arizona are all prime candidates.
Watch the video to learn more.

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To the moon, again!
NASA launched the Artemis I mission on Wednesday from Florida, with the agency’s most powerful rocket ever kicking off a nearly month-long journey with a ground-shaking liftoff.

While no astronauts are onboard, the Space Launch System (SLS) rocket is carrying the Orion capsule on a demonstration for NASA’s lunar program. Artemis I will not land on the moon, but the spacecraft will orbit nearby before returning to Earth in 26 days.
In the final hours of the countdown, a hydrogen leak in a valve threatened to delay the launch. With SLS nearly fully fueled, a small group known as the “red team” was sent out to the launchpad and into the “blast danger area” to try to fix the problem. The team was able to tighten hardware on the leaky valve and returned to safety, with NASA’s launch then able to proceed.
So far the mission is going as planned, reaching orbit around the Earth, but multiple milestones are yet to come – including Orion firing its engines to leave Earth’s orbit and begin the multi-day trip toward the moon.

The Artemis I mission launches on NASA’s Space Launch System (SLS) rocket on Nov. 16, 2022 from Kennedy Space Center in Florida.
Bill Ingalls / NASA

NASA’s Space Launch System (SLS) rocket and Orion capsule stand in preparation to launch at LC-39B of Kennedy Space Center in Florida, on Nov. 13, 2022.

Last week, NASA left SLS and Orion out on the launchpad to weather the winds of Hurricane Nicole.
NASA said it checked the rocket and spacecraft after the storm passed and found no major damage to the vehicle. It said a 10-foot section of insulation near the Orion capsule had pulled away due to the high winds – but NASA decided to proceed with Wednesday’s launch attempt after an analysis showed it was not expected to cause any significant damage if the insulation falls off during the launch.
A host of aerospace contractors support the hardware, infrastructure and software for SLS and Orion – with Boeing, Lockheed Martin, Northrop Grumman, Aerojet Rocketdyne, Airbus and Jacobs leading the effort.
NASA’s program has enjoyed strong bipartisan political support, but the agency’s Inspector General recently warned that Artemis is not a “sustainable” way to establish a presence on the moon. The internal watchdog found that more than $40 billion has already been spent on Artemis, and projected NASA would spend $93 billion on the effort by the time the first crewed landing happens.

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