Homeowners are still pouring money into their homes as renovations and upkeep are generating a large portion of sales for Home Depot (HD) as demand for purchasing homes rose in September and the three massive hurricanes in the U.S. boosted revenue.
Home Depot's third-quarter sales surged in the aftermath of a robust hurricane season that spanned from Texas to Puerto Rico, increasing demand from homeowners who faced immense rebuilding as homes were destroyed by relentless floodwaters.
The Atlanta-based home improvement retailer reported an impressive 7.9% increase in comparable-store sales in the third quarter, which exceeded the Wall Street estimate of 5.8%. Home Depot also beat on earnings, reporting $1.84 a share, 2 cents ahead of forecasts. The company's total revenue was $25.03 billion, up 8% from the same period last year.
Home Depot's third-quarter earnings rose 15% from a year ago and its comparable sales in the U.S. increased at a 7.7% clip.
"Though this quarter was marked by an unprecedented number of natural disasters," said CEO Craig Menear in a statement, "the underlying health of our core business remains solid."
The company was able to raise its fiscal 2017 guidance due to its stellar earnings and now estimates comp sales growth of 6.5% and earnings per share of $7.36, which reflects its $8 billion buyback program this year.
Home Depot shares rose 2.7% to $168.06 on Nov. 14.
Interest from first-time home buyers remains strong and home sales rose in September -- new home sales increased to a seasonally adjusted rate of 667,000, which is up 18.9% month over month and 17% year over year.
The world's largest home-improvement retailer has benefited from strong housing turnover as more Millennials have now bought their first homes.
"First-time home buyers have come back," Home Depot Chief Financial Officer Carol Tome told TheStreet in August. "And some of those homes are being bought by Millennials. It's what we thought would happen."
Purchasing a home remains a sound investment choice for many consumers who benefit from the mortgage and property tax deductions and build equity over a number of years as the valuations typically rise.
"Owning a home is a form of forced savings that helps build wealth over time by rebating some of the costs of shelter and for now, still offers tax advantages," said Greg McBride, chief financial analyst for Bankrate.com, a New York-based financial-content company. "With renting, there is no such rebate and there are no tax breaks."
Homeownership mitigates the potential for high increases in rental payments and being faced with the option of moving frequently.
"One other financial benefit of homeownership versus renting is that as a homeowner, you control your own destiny," he said. "As long as you make the payments, the house is yours. With renting, even the best tenant can be victimized by an unscrupulous landlord that pockets the rent, defaults on the loan, and leaves the rule-abiding tenant subject to eviction upon foreclosure."
Although owning a home is part of the quintessential American dream, accumulating wealth from one is not easy to predict.
"But don't be deceived into thinking that homeownership alone is the path to financial easy street," McBride said. "Over time, the pace of home price appreciation is little more than the rate of inflation. The costs of ownership - closing costs, mortgage interest, property taxes, hazard insurance, homeowners' dues, maintenance and upkeep - mean that the housing appreciation you experience as an owner isn't pure profit. However, owning a home in addition to saving and building wealth through a diversified portfolio are consistent with achieving future financial security."
Predicting the amount a home will appreciate over a decade or longer is difficult. Sometimes it can backfire, which many homeowners were forced to learn the hard way during the financial crisis and recession as valuations plummeted rapidly, leaving some people upside down on their mortgages where they owned more than the house was worth on the market.
Indeed, opting to rent and investing the difference in the stock market can sometimes generate more wealth.
"It would have been better to have rented, not paid taxes and upkeep and have invested in Berkshire Hathaway," said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. "Buying a home is a financing decision. It is similar to the buy/lease decision on a car."
Although real estate values tend to rise over the long run, investing in a home is not a sound "investment" choice for many people, he said. Real estate has the illusion of stability, but fluctuating market prices can put a damper on the investment and depends on the timing of the sale.
"When an individual buys a share of stock they can monitor the value of the investment on a minute-to-minute basis," Johnson said. "People can see the fluctuation in value. With real estate, however, no one is quoting you a price instantaneously on your real estate purchase. Absent a market price, people tend not to worry about the value of their real estate purchase and assume that it is very stable in the short run."
Millennials tend to be conservative with their investment choices and are "drawn to this seeming stability in the value of residential real estate," he said.
Nevertheless, purchasing a home can often be a very poor financial decision and potential home buyers need to be aware of the additional costs and potential pitfalls.
"People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road," Johnson said.
Noble laureate economist and Yale University professor Robert Shiller had made a compelling case that real estate, especially residential homes, are a much inferior investment when compared to stocks. He found that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years.
The stock market's average return on a large stock index such as the S&P 500 has been about 10% while inflation has averaged around 3% from 1926 through 2016 while the inflation adjusted return of the stock market over the past 90 years has been approximately 7%.
The rate of homeownership still remains much lower than the 1998 rate of 9.5% and the rate has remained stable since the commencement of the financial crisis -- hovering around 5% since 2008.
So should you own or rent?
Renting can be a better deal for many consumers, depending on the city and region, said David Reiss, a law professor at Brooklyn Law School in N.Y.
"This is a better question to ask yourself than whether owning is a sound investment choice because you are going to need to live somewhere no matter what," he said. "It is not too helpful to look at national numbers to answer this question - you should look at the figures in the communities you are considering living in."
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