Home Depot shares fell 3 percent Tuesday after the company reported an earnings miss and forecast a slowdown in sales for the rest of the year, marking the latest sign of a cooling housing market.
The lackluster earnings report comes as the U.S. Census Bureau and the Department of Housing and Urban Development released data that showed new residential construction declined in December 2018 to a two-year low.
“To some degree, there is a host of companies and stocks that have a signal about what is going on in the housing market. Home Depot is one of them,” Aaron Terrazas, senior economist at Zillow, said.
Home Depot’s massive success in a booming housing market over the past three years had caused its stock to surge by 50 percent. On Tuesday, the company's figures indicate it is losing that momentum.
With a decline in home construction, developers are obviously buying fewer materials from the superstore. There were 1.078 million new homes under construction in December, an 11.2 percent decrease from the November estimate. It’s also 10.9 percent less than the same period in 2017, according to federal data.
"Home Depot sales are definitely a sign of where the housing market is going in the next one to two quarters, since this is one of the places where developers get their steel and other materials for single-family homes," said Jason Haber, an agent at Warburg Realty in New York.
"The earliest sign that you see is of less home building — new developers see if there is less demand in new housing. If demands for new housing are slipping, that’s a sign of weakness of the housing market," he said.
Issi Romem, chief economist at Trulia, agreed that there are some indicators from home improvement stores that correlate to the temperature of the housing market.
“For discretionary remodels, those especially tend to be tied to the housing market. People usually do some remodeling before selling and after buying,” he said. “However, maintenance has to happen and people still have to do that.”
Home Depot expects sales to grow by 5 percent this year, marking the retailer’s lowest gains since 2012. Fourth-quarter earnings per share were $2.09, falling short of Wall Street’s estimate of $2.16. Additionally, same-store sales, which is defined as those that have been open for at least a year, rose 3.2 percent, falling short of analysts’ estimates of 4.5 percent.
Home Depot Chief Executive Officer Craig Menear said “unfavorable weather,” which included the polar vortex, may have also contributed to its sales miss during the last quarter of 2018.
“The fourth quarter was bad, between high interest rates and the government shutdown. There are all sorts of headwinds,” Terrazas said.
Shares of Lowe’s — Home Depot’s biggest competitor — dropped 2 percent on the news, but have since almost recovered. Lowe’s is set to release its earnings report Wednesday.