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Mortgage rates near 7% cut home sales, and they also keep owners with low fixed rates from moving. Many spend on renovation instead. Investors are selling housing stocks broadly, but home improvement retailers like Lowe's and Floor & Decor and paint maker Sherwin-Williams could gain from that spending.
Source: thenewsherald.com ↗
Higher rates hurt affordability and cut home sales, which is bad for homebuilders and mortgage lenders, as investors already expect. For one group of companies, the effect runs the other way. Owners who locked in 3-4% mortgages in 2020-2021 face hard math. Selling means borrowing again at about 7%, adding $800-1,200 a month on a median home. So many stay put and spend on the home they have. Money meant for commissions, moving and new furniture goes into kitchens, bathrooms, decks and heating and cooling upgrades. This renovation market is huge, and it has held up when home sales shrink. Investors are selling housing as one group. Yet mortgage lenders, title companies and brokers need home sales, while home improvement retailers and building products makers need renovation. The second group is being dragged down with the first. With 10-year yields at 5.00%, rates look sticky, so the lock-in may last.
Investors see mortgage rates near 7% as bad for every housing-related stock. They are selling homebuilders, mortgage lenders and home improvement companies together, on the view that housing is broken. The selling makes little distinction between them.
Why that may be wrong
Investors are treating housing as one bet. Yet at high rates, renovation spending can hold up even as home sales fall. When housing funds and sector funds sell, they sell renovation-linked companies along with mortgage lenders and title companies that really are hurt. Housing economists know the lock-in effect well, but it reaches stock prices slowly, because sector funds do not tell the two groups apart.
If mortgage rates fall back below 6% within 60 days, the lock-in weakens. Homeowners start buying and selling again, and the push to renovate fades. Watch for the 10-year Treasury yield dropping below 4.50% along with a clear rise in existing home sales in the monthly NAR data. Also, if consumers come under credit stress and run short of cash, they put off renovations. Credit card delinquency data from big banks would show that early.
Rates of 7% also signal wider consumer stress, which could in time cut spending on optional renovations. Owners who feel trapped by their mortgage may also be stretched by home equity lines of credit (HELOCs), which have floating rates and are now expensive. Large projects could then be out of reach. The weakest assumption is that owners have enough home equity and steady income to pay for renovation in cash or through a HELOC. If HELOC rates of 8-9% choke off that borrowing, the lock-in stops feeding renovation. Third-quarter 2026 results showing a quarter-on-quarter drop in same-store sales at home improvement retailers, alongside rising HELOC delinquencies, would undo this view.
In 2018, the 30-year mortgage rate rose to about 5% and produced the same lock-in. Existing home sales fell, but home improvement spending still rose that year. Home Depot and Lowe's (LOW) both beat the S&P 500 by 8-12% in the 12 months after rate worries peaked in late 2018. The 2022-2023 rate shock brought the sharpest drop in home sales since 2008, yet renovation spending stayed high. Harvard's Joint Center for Housing Studies reported remodeling above $400B a year through 2023, even as existing home sales fell more than 30% from their peak. Both times, lock-in moved owners' money from moving into renovation. This fits prospect theory: owners treat giving up their low rate as a loss they refuse to take, so they renovate instead.
Mortgage rates near 7% make homes less affordable and cut existing home sales. Sector funds sell, dragging down every housing-related stock alike.
Homeowners with locked-in 3-4% mortgages sensibly refuse to sell, so few homes come on the market. They spend the money they would have used on moving on kitchens, heating and cooling, windows and bathrooms instead, the next-best use of their housing budget.
US building products makers (cabinets, windows, doors, heating and cooling parts) and home improvement sellers with mostly domestic sales keep seeing steady demand. Yet their shares are sold alongside companies that depend on home sales. As renovation spending shows up in earnings over the next 2-3 quarters, investors are likely to tell the two groups apart. Renovation-linked companies could then rise against those that need home sales.
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