Why Home Depot Says Home Prices Will Continue to Rise

If you've ever purchased a home, then you understand why the dynamics of the housing market are critical to the success of Home Depot (NYSE: HD  ) . This is why, assuming the company's economic forecasts are accurate, shareholders in the retailer have reason to be optimistic.

The big issue in the housing market right now is supply. That is, there isn't enough of it.

The housing market is said to be in balance when the supply of listed homes equals six months' worth of sales. If the supply exceeds that -- if, say, the current supply is equal to seven months' worth of sales -- then home prices will likely fall. But if supply is less than the six-month threshold, then the opposite holds true and prices would typically rise.

Where are we now? As of February, there were an estimated 2 million houses listed for sale. Meanwhile, an average of 385,000 homes sold in each of the previous six months. This equates to a current supply of 5.2 months' worth of sales (2 million divided by 385,000).

If you've been wondering why home prices have been shooting higher despite the ongoing economic malaise, this is it. Since February 2013, they've jumped by double digits on a year-over-year basis in 11 consecutive months, increasing most recently by 13.2% in January.

To get back to Home Depot, in turn, this is great for the massive home improvement retailer because home prices are one of its principal business drivers. As CFO Carol Tome noted on the latest conference call (emphasis added):

As we look at the macro, we think housing will be a contributor to our growth next year of about 200 basis points. We think it contributed about 250 basis points in 2013. Biggest driver is home price appreciation. And last year, as you know, home prices were up double digit. We're not forecasting that in 2014. We think it'll be up around 6%. Now home prices have 21% to go before they return to peak, so perhaps it's a conservative outlook, but we think it's a realistic outlook to build a plan on.

For Home Depot's shareholders this means two things. First, if these predictions pan out, then the company will have the ammunition necessary to increase its dividend, as its executives have promised. And second, it means that the retailer's sales, earnings, and thus share price should similarly respond in kind.

2 stocks changing the retail world
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2920725, ~/Articles/ArticleHandler.aspx, 8/30/2015 10:02:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
HD $117.52 Down -0.14 -0.12%
Home Depot CAPS Rating: ****