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Here's when Home Depot will start getting worried about the US housing market
(Scott Olson/Getty)
"There's a way to go" before Home Depot becomes concerned about the US housing market, according to Carol Tome, the company's chief financial officer.
The market's resurgence after its crash a decade ago has boosted not just the economy, but the home-improvement retailer's earnings. On Tuesday, Home Depot reported an 18% year-on-year rise in fourth-quarter net earnings to $1.74 billion, topping analysts' forecasts.
Analysts are meanwhile watching for the impact of the post-election rise in mortgage rates along with other borrowing costs. On Tuesday, the Bankrate.com 30-year fixed national average mortgage rate was 4.01%, up from 3.53% on election day according to Bloomberg.
A Wolfe Research analyst asked Home Depot's executives on the earnings call what level of rates would become would be a concern.
"Our analysis would show that for every 25-basis point increase in mortgage rates, it costs the homeowner who's applied for a mortgage $40 more per month," Tome said.
"With the median home price in the country of $250,000, mortgage rates could go up to 7%-ish before the affordability index would fall at 100 or below" Tome said. "So there's a way to go before we'd be concerned."
At 100, the National Association of Realtors' affordability index shows that a family earning the median income has just enough to qualify for a mortgage on a median-priced home. The latest reading on the index was 162.8 in December.
"Mortgage rates stand today at 4.2%, 4.3%, something like that," Tome said. "The historical mean is 5.8%. So even if you return to the mean, you're still below that inflection point."
Although the affordability index is still above 100, tight housing inventory suggest that home prices may rise to more unaffordable levels for some buyers.
"The lack of homes for sale is causing a 'matching-trap' in which current homeowners are reluctant to sell because of concern over the ability to find a home to buy and the likelihood that their new mortgage will have a higher rate than their existing mortgage," said Mark Fleming, chief economist at First American, in a note Tuesday.
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