Foreclosures dragging home improvement spending

By Rachel Tobin Ramos

The Atlanta Journal-Constitution

Even though the housing market is in a “choppy but sustaining recovery,” sales at Home Depot and Lowe’s, the nation’s largest home improvement stores, are not likely to grow robustly until 2011 or 2012, according to an analysis released Monday by Colin McGranahan, an analyst with Bernstein Research.

He believes there’s a one year supply of foreclosures in a shadow market that hasn’t hit the housing market yet. This “shadow inventory” is made of 1.7 million homes in foreclosure and another 3 million to 5 million homes with mortgages in delinquency that haven't hit the housing market yet.

Foreclosures are “a persistent issue that is suppressing home prices,” he said. “Our view is that home prices are going nowhere in a hurry.”

That in turn negatively impacts home improvement spending, because about 50 percent of home improvement expenditures are on big ticket remodels and additions, he said.

Remodels typically have been funded through home equity lines of credit, which banks have made much harder to obtain, he said. In addition, about 25 percent of mortgage holders have negative equity in their homes, McGranahan said.

Still, even predicting a bearish recovery, he believes the stock of Home Depot and Lowe’s is “undervalued.”

McGranahan is targeting Home Depot to rebound to $36 and Lowe’s to $28. Home Depot closed at $32.38 Friday and Lowe’s at $24.54.