Home Depot (NYSE:HD) stock has been taken to the woodshed. Shares of the leading building materials retailer have slumped 27% from their 52-week highs. This comes as investors react to rapidly rising interest rates.
The Federal Reserve has already begun to raise interest rates, and has promised additional rate hikes in coming months. 30-year U.S. mortgage rates have surged from the low 3% range to above 5% now as the market factors in this new economic reality. Treasury bonds are selling off as well, with that market hitting fresh lows on Tuesday. It’s a perfect storm, at least as far as sentiment is concerned, for the housing industry.
And yet, new data from the Commerce Department released Tuesday found that the housing market continues to grow. Housing starts rose in March, which was contrary to economists’ expectations. Furthermore, building permits increased as well. Permits today lead to new housing starts in the future, indicating that the housing boom still isn’t out of gas quite yet.
Sure, much higher mortgage rates are going to eventually slow down the housing market. However, investors may be too concerned with a replay of the 2008 financial crisis. There’s simply little reason to think we’ll see anything like that style of bust this time around. Economic metrics such as housing affordability and household savings are on much stronger footing this time around.
Even supposing the housing market does tank again, does that necessarily crush Home Depot’s prospects? Not at all. The company isn’t just involved in new home sales, people use Home Depot to renovate their existing houses and associated things such as gardens and garages. Though it’s too early to tell how much behavior change will stick permanently, a lot of people took up new hobbies such as gardening and landscaping during the pandemic. This could lead to sustained higher demand.
Also, with housing prices remaining elevated and demographics being favorable, even if new home construction dips, look for the used market to stay robust. That should be enough to support Home Depot’s undemanding valuation. As things stand today, HD stock is selling for just 19 times forward earnings and analysts see earnings growing in 2023 as well.
The bottom line on HD stock is that it is already priced for the upcoming housing bust. And sure, that may indeed end up happening, in which case Home Depot would be no bargain today. However, the price is right and optionality is in an investor’s favor here. If the housing market is able to shake off higher interest rates, Home Depot should enjoy a speedy recovery and move back toward its all-time highs.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
