Get Used to the Housing Market's New Normal

Key Takeaways

• Home Depot Poised for Growth: Analysts at Melius Research believe Home Depot (HD) will benefit as consumers adapt to persistent mortgage rates and resume moving and renovating.

• Stock Price Target Raised: Melius Research set a price target of $455 for Home Depot, slightly above Visible Alpha’s Wall Street average.

• Cautious Optimism on Home Equity Usage: Home Depot CEO Ted Decker remains uncertain about the pace at which homeowners will leverage home equity for major renovations.

Housing Market Adjusts to Elevated Rates

The U.S. housing market has been characterized by limited turnover and persistently high mortgage rates, compounded by inflationary pressures and tariff concerns. However, analysts at Melius Research argue that consumers cannot indefinitely postpone home upgrades and relocations. They anticipate a surge in renovation and construction activities, which is expected to significantly benefit home improvement retailers like Home Depot.

Melius Research expressed confidence in this market shift, stating, “Homeowners cannot continue to halt their investments in existing homes given the wear and tear over the years or halt their decisions to upgrade, downgrade, or change their existing footprint. We believe the stalemate will come to a head.”

Home Depot’s Market Position

Data shared by Home Depot during its latest earnings call suggests that the long-standing renovation slowdown may be easing. The company reported a 0.9% year-over-year increase in transactions valued at $1,000 or more in the fourth quarter of 2024, reversing a 6.8% year-over-year decline in the third quarter. These “big ticket” transactions indicate that homeowners are beginning to invest in significant upgrades once again.

Despite this improvement, CEO Ted Decker remains cautious. While some homeowners have begun tapping into their home equity to finance renovations, he emphasized that it remains uncertain whether this trend will accelerate in 2025. “They’ll eventually tap that equity and do the larger remodeling projects,” Decker noted. “We’re just not sure that turn comes in 2025 at a dramatically accelerated pace.”

Stock Market Reaction

Following the release of its latest earnings report, Home Depot shares closed nearly 3% higher, reflecting renewed investor confidence in the company's growth prospects.

Warren Buffett's Strategic Investment in Japanese Markets

Buffett’s Influence Spurs Market Gains

In a surprise move, Warren Buffett announced that Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) would increase its stake in five major Japanese trading houses: Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo. His endorsement of these firms triggered a surge in Japanese equities, even as U.S. markets experienced a decline.

Expanding Holdings in Japanese Trading Houses

Buffett originally disclosed his investments in these firms in 2019 but had maintained ownership stakes below 10%. In his latest shareholder letter on February 22, he revealed that the trading houses had agreed to “moderately relax” this ownership cap, allowing Berkshire Hathaway to increase its positions.

Market Reaction

The market response was immediate. Shares of Mitsubishi surged 7.5%, while the other four trading houses each gained over 5%. This rally came despite the Nikkei 225 falling 1.57% at Tuesday’s opening, following a public holiday on Monday.

Berkshire’s Financial Commitment

As of the end of 2024, Berkshire Hathaway’s total investment in these trading houses amounted to $23.5 billion. The company has spent $13.8 billion on its current holdings and expects to generate $812 million in dividend income from these investments in 2025.

Buffett’s move underscores his long-term confidence in Japanese trading houses, which operate diversified businesses across industries such as energy, commodities, and consumer goods. “These companies very successfully operate in a manner somewhat similar to Berkshire itself,” Buffett noted in his letter.

Conclusion

Home Depot’s outlook is strengthening as homeowners adapt to high mortgage rates and move forward with renovation plans. Meanwhile, Warren Buffett’s strategic expansion in Japanese markets has reaffirmed his global investment acumen. As market dynamics evolve, investors should stay vigilant and consider opportunities that arise in both domestic and international markets.