In Hammers, Nails, And Caulk We Trust

Rising interest rates haven't dampened boomers' fervor for home remodeling

Shopping at a Home Depot Expo Design Center recently, Kent Carter and his wife, Kimberly, were eager to plunk down $50,000 to remodel their three-bedroom townhouse in Chicago's tony Lincoln Park neighborhood. The 32-year-old corporate lawyer figures that a new kitchen, granite fireplace, and crown molding will push up the value of their $555,000 home. And rising interest rates won't discourage him from tapping a home-equity loan to finance more fix-ups next year, he says, because "you're better off putting your money into a home than into CDs."

Interest rates may be on the upswing, but that isn't fazing the home-improvement giants. Executives at Home Depot Inc. (HD ) and Lowe's Cos. (LOW ) expect the do-it-yourself boom to continue even if housing sales slip and loan growth flattens. They argue that baby boomers, entering their prime home-remodeling years as their earnings peak and their kids fly the nest, will sink money into new decks and hardwood floors. And if the economy -- and jobs -- continue to soar, consumers will put more cash, not less, into their homes, they say. "Rates are going up, but probably not enough to hurt home improvement," says Joe Bonner, an analyst at Argus Research Co. in New York.

The rush to remodel has been good to the two chains. On May 18, Atlanta-based Home Depot reported that first-quarter profits jumped 26% year-on-year, to $1.1 billion, and bumped up its profit-growth forecast for the year from 7%-11% to 10%-14%. Mooresville (N.C.) rival Lowe's reported 8.1% higher profits and stuck to its forecast of a 16% spike in earnings in 2004. Investors have pushed Home Depot's stock up 6% since May 7, to around $35, while Lowe's shares have swelled 9% since May 10, to almost $54.

Now the chains are revving up expansion plans. Lowe's will open 140 new stores this year. Home Depot will add 185 and spend $1 billion to upgrade more than 300 others. "We don't see that there's a finish line [for growth]," says Carol B. Tomé, the chain's chief financial officer.

Some analysts are getting nervous about such widespread optimism. For example, Banc of America Securities downgraded Home Depot from a "buy" to a "neutral" rating on June 2, citing risks that the chain won't be able to maintain its 7% same-store sales growth per quarter if rising rates pinch home sales. BofA analyst Aram Rubinson argues that "a 5% to 10% drop in housing turnover could trigger a spate of negative [sales comparisons for Home Depot] in the not-too-distant future." Analysts also worry that new stores are starting to cannibalize sales at existing ones. Home Depot says first-quarter same-store sales would've been 2.3% higher without its new outlets.

The chains are betting that sales of existing homes, which account for 79% of the $550 billion fixer-upper market, will remain buoyant. According to the National Assn. of Realtors, such sales are likely to dip only slightly this year, by 1.6% from 2003's all-time high, and another 1.2% next year. While rising rates are taking a big bite out of the overall refi market, cash-out refis often used for home upgrades won't fall nearly as much. Mortgage-finance outfit Freddie Mac (FRE ) forecasts overall cash-out refis of $114 billion this year, down from last year's record $139 billion but still four times the total just four years ago.

The home-improvement crowd even argues that a slowdown in the heady rise in house prices shouldn't hit them either. Home prices rose 7.5% last year, but should increase just 4.7% this year and 4.5% next, the Realtors' association says. Economists argue that's still faster than the rate of inflation, so it should not be a big drag on remodeling outlays.

Either way, the Carters are mulling their next project already. They want to spruce up a bedroom for the baby they plan to have next year. Before long, they'll probably be back at Home Depot for paint brushes and wallpaper.

By Brian Grow in Atlanta, with Michael Arndt in Chicago

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