The U.S. housing market, which has been undergoing a relatively steady recovery since the Great Recession, seems to be hitting a speed bump. However, that doesn’t necessarily spell trouble for home improvement retailers, according to a report published in September by Goldman Sachs co-authors Matthew J. Fassler, Samuel H. Eisner, Rachel Binder, and Chandni Luthra. Whereas a decade ago the slowdown might have raised a red flag for the home improvement retailers like Home Depot and Lowe’s, shifts in consumer expectations and lifestyle trends and advances in technology are supported by many of these very retailers and their suppliers. As a result, we can anticipate relatively smooth and steady sailing for the foreseeable future.
What the Numbers Tell Us
Despite the strong economy, low interest rates and healthy job market, sales of new and existing homes fell in July and August compared to the corresponding periods one year ago.
Millennials are now starting to form households and families, but their stagnant wage growth plus rising home values make the purchase price of houses less affordable.
The level of overall home sales for August was 5.35 million units — the lowest level since July 2016. According to Goldman, the housing sales slowdown was aggravated by Hurricane Harvey’s arrival in the Houston area on August 25th, seriously impacting the fourth largest U.S. metro area. Exacerbating the storm’s force, the forecast of interrupted housing sales was extended after Irma and Marie devastated other areas of the Southeast and Caribbean. Although the impact of these terrible storms will eventually result in a rebound in construction as the affected areas rebuild, for the near term the storm fallout will continue to exert upward price pressure due to a decreased inventory of homes.
Why the Home Improvement Sector is Thriving
Home improvement companies have continued to thrive despite the housing headwinds. The Home Depot (HD) has steadily increased in stock value since mid-August, as has Lowe’s Companies, Inc. (LOW). In fact, for the last five years, home improvement companies have generally increased and improved, with the S&P 500 Home Improvement Retail index up 145 percent in the period. At the Goldman Sachs Retailing Conference held in New York in September, these companies reported favorable trends despite the weakness in housing.
Why is this? For starters, the “buyer’s” market in homes is resulting in a rise of pre-sale renovations. Hopeful home sellers are hitting the “refresh” button before putting a home on the market, using everything from a coat of paint to a full-blown home “staging” to make their property more attractive to would-be buyers and, hopefully, buoy the selling price. But beyond that, home improvement retailers and their suppliers are challenged to transform themselves with the shifting physical and digital marketplace and rapidly evolving expectations of consumers. These expectations have been heightened by the rapid rollout of apps and other technological developments aimed at the home space, and from the increased focus on, and importance of, a home-based lifestyle among consumers.
Millennials, the demographic that began reaching a demographic majority in 2000, are putting down roots and starting families. The allure of the at-home lifestyle among this crowd has been reflected by the growth of programming like HGTV’s wildly successful House Hunters and The Property Brothers; the rise in DIY YouTube stars like DIY Tyler, with over 100K followers; and other infotainment vehicles that inspire consumers to alter their living space.
Then there are the baby boomers, those born in the Post-World-War-II years from 1946 to 1964, who are rapidly approaching retirement years, but are far from ready for the rest home. Many empty nesters are downsizing to smaller or differently styled houses. Others, interested in downsizing but not assured to get the prices they had hope to get for their homes, are deciding to stay where they are and update their homes to accommodate their new lifestyles. According to the National Association of Home Builders (NAHB), popular new home features of this crowd include wider doorways, home offices for part-time work, media centers, and ground-floor bedrooms. These phenomena provide a solid revenue stream for home improvement retailers. Renewed interest in gardening and other yard-based activities are additional pluses for the likes of Lowe’s and Home Depot, whose landscaping offerings are significant.
The Gig Economy
Another driver of DIY growth has been the meteoric growth of sites and apps that link home residents with home improvement ideas and the people to do them.
Angie’s List (ANGI), founded in 1995 to provide online reviews and listings of contractors, went public in 2011, and has a market cap of about $750 million. The company’s 10 brands include the flagship Angie’s List, Home Advisor, CraftJack and others, which connect homeowners with suppliers in eight countries around the world.
Houzz, started in 2008 by Adi Tatarko and Alon Cohen, Palo Alto homeowners who create the platform to help with their own home renovation project, links consumers with home ideas and the skilled people to turn them into reality. Boasting 40 million users, the company’s latest round of venture funding, which raised $400 million, put the company valuation at $4 billion.
Task Rabbit (released acquired by privately-held home décor retailer IKEA), Aladon, Gigwalk and many others also help users find helpers on demand for home projects and repairs. As the population ages and economic stability continues, people will have less time to do their own home improvements. As these apps become increasingly prolific, and it’s easier and cheaper to find others to do chores and projects, fewer people will even consider it, perhaps creating the need for a new acronym, as Do It Yourself becomes a misnomer.
The Next Frontier: VR and AR
But it is the advent of virtual and augmented reality that many industry experts feel will truly move the needle in terms of sector disruption. The release of the groundbreaking 1990 action film, “The Matrix,” sparked a worldwide fascination with virtual reality, a concept that, if anything, has continued unchecked in recent years. Goldman’s Heather Bellini has said she expects virtual and augmented reality to become an $80 billion market by 2025. Home improvement companies have already begun to use virtual and augmented reality technology to illustrate how consumers might decide what to buy to build, furnish, and decorate their homes. Lowe’s, Sherwin Williams (SHW), and The Home Depot, along with many others, have explored the space in various capacities, luring consumers and users with demonstrations of the value of integrating the physical and the digital to make the most of home improvement. AI and machine learning can’t be far behind. We now have a robot that can vacuum a house. What about a robot that can paint one, redecorate and remodel?
For the past three years, Lowe’s has been making a name for itself in the realm of using augmented and virtual reality to improve customer experience and mitigate the risk associated with home improvement decision-making. Its Holoroom 3D Virtual Reality shopping experience allows customers to engage with products via a design process on an iPad, and then experience their selections using an Oculus Rift in store. Recently, Lowe’s released a new app that measures physical spaces in homes, an augmented reality tape measure replacement.
Home décor e-commerce disrupter Wayfair (W) just released an app that serves a similar purpose, allowing shoppers to see how sofas, lamps, or other products look in their rooms using an iPad or an iPhone. Not to be outdone, Home Depot has been playing in this space for the past several years as well, spending many millions to upgrade its ecommerce and m-commerce user interface (which it calls “interconnected retail”) and make shopping at the brand’s cavernous stores (which, collectively, are conveniently located near 95% of the U.S. population) easier, more fun, and more rewarding. Last year alone, the home building supplies retail giant reportedly had 1.5 billion visits to its website. Almost half of those visits came from smartphones and tablets. Home improvement has become far more than a dreaded daylong trip to a brick-and-mortar store.
Sherwin Williams has similarly become far more than just a “paint” company. Instead, its “Try On Color” app, along with its “ColorSnap Visualizer” tool, match colors to those in real life. There are thousands of paint colors available, which allows the user to envision the selected colors without the mess of swatches on a wall. Project Color™ by The Home Depot serves a similar purpose for painting, as it allows the user to play around with different colors and schemes from different angles and viewpoints.
What to Take Home
What does all of this mean for the future of the home improvement field, apart from turning science fiction and video game technology into an unexpected reality, allowing a user to indulge in the endless possibilities of remaking a room, or discovering a previously unknown eye for design? DIY home improvement has become an engaging field of exploration and discovery, and one that promises rapid growth. Furthermore, the ubiquity and accessibility of stores like Home Depot and Lowe’s, and the services they offer like ecommerce, delivery, etc., are making for a seamless omnichannel experience for customers that will deepen loyalty. Provided these companies continue to partner with and invest in technology that enhances these services, they should continue to thrive until another major disruption happens.