Home Depot (NYSE:HD) isn’t concerned that rising mortgage rates will adversely affect the housing market, saying tax cuts and strong home prices will help drive home-improvement spending in 2018.
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Carol Tome, Home Depot’s chief financial officer, said Tuesday the federal tax reform bill signed by President Trump in December is a net positive for the housing industry. She added that higher mortgage rates are also a sign of a stronger housing market, which will serve as a tailwind for stores like Home Depot. Home prices have surged to a new high, with the S&P CoreLogic Case-Shiller index jumping 6.2% in November.
Mortgage rates would have to surpass 7% to negatively impact affordability for homebuyers, according to Tome. That would reflect a 67% increase over current rates.
“The U.S. economy is strong, and tax reform is net positive for the housing industry. We expect higher job growth, higher income growth, and yes, higher mortgage rates. But with that comes higher home price appreciation and rising housing demand, which should drive home improvement spending,” Tome said during a conference call with analysts.
The Atlanta-based company has largely bucked the retail headwinds pressuring rivals across the industry. Many retailers have closed stores amid a growing threat from e-commerce competitors, as consumers shift more of their spending online. Home Depot has kept shoppers coming to its stores, noting that comparable sales doubled in the lumber, electrical and tool departments in the last quarter.
Home Depot, which reported stronger sales growth than expected for the fourth quarter, is forecasting a 6.5% increase in sales this year. Fourth-quarter revenue was up 7.5% at $23.9 billion, while the average customer’s ticket grew 5.5% to $64 per person.
Tome said Home Depot doesn’t see any concerns related to interest rates over the next several years, even as policymakers at the Federal Reserve debate how fast to raise rates. The central bank is expected to raise its benchmark fed funds rate three times in 2018, and investors are bracing for a possible fourth rate hike if inflation growth accelerates. Meanwhile, the yield on the 30-year Treasury note has extended its run higher, hitting a four-year high of over 2.9%.
But economists estimate that the rate on a 30-year mortgage will average 4.3% in 2018, only slightly higher than the current 4.2% rate and below the 30-year average of 5.6%. CEO Craig Menear added that the National Association of Realtors’ Housing Affordability index remains at “terrific” levels.
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Tax cuts are also seen as a boon to Home Depot, offsetting a cap on deductions for state and local taxes and mortgage interest.
“Eighty percent of American households are going to have more money this year because of tax reform, given the increases in the standard deduction,” Tome said.