There is no question that the real estate market is cooling. According to the Federal Reserve Bank of Dallas, U.S. home prices could fall 20% from current levels as higher mortgage rates "boost the odds of a severe house price correction."
The Dallas Fed is not alone. According to advisory firm KPMG, a 15% drop in U.S. home prices represents a "conservative scenario." In a CNBC interview, Wharton professor Jeremy Siegal predicted "the second biggest decline since the post-World War II period over the next 12 months."
None of this should come as a surprise. According to the S&P/Case-Shiller U.S. National Home Price Index, from March 2020 to June 2022 U.S. home prices skyrocketed 42%. There was bound to be a significant pullback after interest rates climbed and the market finally cooled.
At the height of the pandemic, stocks such as Home Depot (HD) and Lowe's Companies (LOW) were beneficiaries of a strong housing market. Will those stocks now suffer in a cooling real estate market?
Not necessarily. In mid-November, Home Depot beat analysts' expectations for both earnings and revenue. Home Depot also reaffirmed its full-year guidance, an indication that it hasn't yet felt the impact of slowing real estate sales.
Meanwhile, Lowe's raised its full-year guidance as both earnings and revenue topped estimates. Both companies indicated that higher prices were not having a negative impact on sales.
Going to the charts, Home Depot has formed a rounded bottom pattern (curved black line). This formation projects the stock to the $375 area.
Over the past month, the stock has climbed above both its 50-day (blue) and 200-day (red) moving averages. Since mid-November, volume has been considerably higher on positive days versus negative days (shaded yellow).
Chart Source: TradeStation
Lowe's has a similar chart. This chart also features a rounded bottom pattern, a break above key moving averages and higher volume on positive days. The formation projects Lowe's stock to the $245 area.
Cahrt Source: TradeStation
When comparing Lowe's and Home Depot head to head, there is no discernable advantage to owning one stock over the other. Both have a price-to-earnings (P/E) ratio of about 20. Both have a dividend yield of about 2%.
Both companies indicated in post-earnings conference calls that demand from professional contractors remains strong. With home improvement contractors still in high demand and contractors reporting significant backlogs, Home Depot and Lowe's are well-positioned for near-term growth despite a looming contraction in the housing market.
