Home Depot may need an interest rate cut to boost its sales

Business

A sign is seen posted on the exterior of a Home Depot store on February 21, 2023 in El Cerrito, California. 
Justin Sullivan | Getty Images

Just like Wall Street, Home Depot is closely watching the Federal Reserve’s next move.

In an interview with CNBC, Chief Financial Officer Richard McPhail said homeowners have postponed moving into new houses or starting major projects that require financing because of higher interest rates. That waiting game has only intensified with a potential interest rate cut in sight.

“What our customers tell their pros is, ‘Everything I read tells me interest rates will be lower in three to six months,'” McPhail said. “‘Why would I borrow to finance the project now rather than just wait a few months?'”

CEO Ted Decker also told investors on an earnings call on Tuesday that many homeowners face a “golden handcuffs dynamic” because they have mortgages as low as 3% and don’t want to move, locking themselves into a higher rate.

An interest rate cut could help move the needle for Home Depot as sales slow. The company on Tuesday beat analysts’ expectations for quarterly earnings and revenue, but gave a disappointing full-year forecast. It said it expects comparable sales, a metric that takes out the impact of store openings and closures and other one-time factors, to drop by 3% to 4%. That’s a deeper fall than the 1% decline it previously anticipated.

The Federal Reserve has dropped hints that an interest rate cut could come soon. In late July, Fed Chair Jerome Powell said central bankers could reduce rates at their next meeting in September if the economic data backs up the decision.

Some fresh data on Tuesday pointed in a positive direction. The producer price index, which measures wholesale prices, rose 0.1% in July, which was less than economists expected.

Decker said on Tuesday’s call with investors that it is tricky to guess the “magical rate number” that would drive Home Depot’s business up again. But he said when mortgage rates dropped late last year, the company saw “an immediate increase in housing activity,” including mortgage applications and mortgage refinancing applications.

He said a drop to around 6.5% for mortgage rates would likely approach “a level that people are going to engage.”

Rates fluctuate, but have hovered closer to that level lately. The average rate on a 30-year fixed mortgage declined to 6.4% early this month, according to Mortgage News Daily. That is the lowest rate since April 2023.

But it’s unclear whether consumer uncertainty could still drag on Home Depot, even when lower mortgage rates stick.

Home Depot’s leaders chalked up some of its weaker sales to a newer sense of caution among its customers, even though the vast majority of them own houses and have seen huge home equity gains.

“What more recently has happened is a broader concern with the macroeconomy,” Decker said on the call. “There’s just a lot of noise with the political and geopolitical environment. Unemployment ticked up. Inflation keeps eating away at disposable income, and I think people just took a pause as we’ve progressed through the quarter.”

Even with an interest rate cut, Decker said, “people still might pause a little bit until some of this gets sorted out.”

— CNBC’s Diana Olick contributed to this report.