Home Improvement Shows Gains—But May Not Last

The nation’s largest home improvement retailer, Home Depot, surprised the Street on Tuesday, beating profit estimates for the last quarter. It is also raising earnings outlooks for fiscal 2012.

Home Depot
Rich Pedroncelli
Home Depot

It’s banking on continued improvement in market share and in the housing market, especially in California and Florida, which were two of the worst hit states in the recent crash.

Those two states were among the top sales performers for Home Depot in the quarter. (Related: Home Depot Earnings)

“These are encouraging signs of stabilization in the housing market,” said Home Depot Chairman and CEO Frank Blake on an investor conference call.

As some analysts claim the housing market is rising from the bottom, citing the highest level of housing starts in three years, others caution that the ills still plaguing the market stand as severe headwinds to the home improvement retailers in general.

The foreclosure slowdown to a five-year low, said California-based analyst Mark Hanson, could hurt the likes of Home Depot. He cites the 22 percent (month-over-month) July drop in home sales in Phoenix as an example.

“The Phoenix region is a leading indicator to other more ‘distressed’ regions that made up most of the dead-cat bounce in Q1 and Q2 housing. The foreclosure rehab trade is now a headwind to Home Depot,” Hanson said. (Related: Why Drop in Foreclosures Is Bad for Housing Market)

Hanson expects July existing home sales to come in at the lowest annualized rate of the year. While few others are predicting such a “triple-dip,” Hanson has been warning for months that a drop in distressed supplies would stem the rebound in home sales, and it did just that in May and June.

This is not to say that the foreclosure crisis is gone, just perhaps delayed for the next few quarters. There are still 5.7 million loans that are either delinquent or in the foreclosure process, according to the latest reading from Lender Processing Services. While not all of those loans will go to final foreclosure, many of them will, and there is a huge cadre of hungry investors waiting to buy them up and do quick rehabs in order to rent them out.

Along with foreclosure issues, rising mortgage rates could also thwart some home improvement gains. Record low rates have prompted a surge in refinancing, giving many Americans extra cash to spend on remodeling. Home Depot cites sales gains in kitchen and bath, some of the first projects homeowners undertake when they have the means to do so.

“Today’s rates on the street are the highest since the last week in May, back at 4 percent,” said Hanson (quoting no-point to no-cost loan rates).

He also also noted most of those who could benefit from rates below 4 percent already refinanced in June and July. “Thus the cliff dive in weekly mortgage applications over the next three weeks will be one for the record books.”

—By CNBC's Diana Olick

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