Watch out when you hear a notion becoming theory. The latest is that Home Depot's (NYSE:HD) and Lowe's (NYSE:LOW) fortunes are directly linked to the direction of mortgage rates.
In the past month, rates on the 30-year fixed mortgage have risen more than a full percent as investors and institutions flee the bond markets. This has the obvious effect of making houses less affordable by cranking up monthly payments. As such, companies that are closely linked to the housing market are thought to be at risk. For those directly involved with the mortgage business or homebuilding, this makes some sense. For companies like Home Depot and Lowe's, the link is more tenuous.
So tenuous, in fact, that Home Depot's stock price has shown almost no correlation with mortgage and interest rates over the last several years. In fact, since 1998, whenever rates have risen, Home Depot managed better earnings, operating cash flow, and a higher stock price. Meanwhile, in the last three years, the stock declined more than 50% as interest rates dropped to historic lows.
Think about that for a minute: In 2001 and 2002, the amount of cash-out refinancing exceeded $300 billion, many times higher than the average year in the 1990s, as rates dropped and housing prices skyrocketed. This ought to have been a bonanza for Home Depot. Except that it wasn't. Top-line and bottom-line results have increased, for sure, but by no means have we witnessed any form of spike at Home Depot.
But Home Depot's at risk now that mortgage and refinance markets are tightening up? Please. While the flood of cash over the last few years has provided an excellent environment for Home Depot, it could be that the home market follows that of the car industry after 2000. Where people were simply trading up for the newest model car during the boom, once salaries and employment came under pressure, folks tended to keep their existing cars longer and repair them -- boons for AutoZone (NYSE:AZO), Pep Boys (NYSE:PBY), and other parts and accessories stores.
The home business is decidedly different from the automotive industry, but the legions of folks electing to fix and remodel rather than move as the markets grow more expensive could provide ballast for Home Depot. At a minimum, there is no way that the relationship between Home Depot and interest rates is as simple as the talking heads would have you believe.
Bill Mann owns shares of Home Depot.
The last thing you want to do is rush into a new house just to save a quarter point or two on rates. But when it's time to buy, a good rate can make all the difference. Whether buying a new house or looking to fix up your current home, you'll definitely want to check out our Home Center.
