Fewer people are going to Home Depot. That could be a bad sign for the housing market

By Paul R. La Monica, CNN Business

Home Depot has thrived in the red-hot housing market, but there are growing signs that demand is finally starting to cool.

Although Home Depot’s second-quarter earnings and revenue topped forecasts on Tuesday morning, a few stats were concerning: For example, same-store sales growth, which measures how well locations up at least a year are doing, rose just 3.4% in the US.

That’s a big dropoff from the first quarter and below analysts’ estimates.

What’s more, fewer people were shopping in Home Depot stores this quarter. The company reported 481.7 million customer transactions, down nearly 6% from the same period a year ago.

Shares of Home Depot, which have soared more than 25% so far this year, were down more than 4% in early morning trading Tuesday on the news. Investors seem worried this could be a trend, as rival Lowe’s — which will report its second-quarter results Wednesday — fell 4% too.

The good news for Home Depot is that customers are spending more on higher-priced items. The average customer ticket rose 11% from a year ago, and sales per square foot also rose from last year.

Nonetheless, Home Depot CEO Craig Menear noted in the company’s earnings release that this is a “dynamic and challenging environment” for the company.

Industry watchers are increasingly concerned that surging home prices, which are largely due to limited supply and strong demand from city dwellers looking to flee to the suburbs during the pandemic, could finally put an end to the housing boom. Even though mortgage rates remain low, bidding wars have made buying a home unaffordable for many Americans.

But builders aren’t constructing new homes fast enough. The federal government will report housing starts and building permits numbers for July on Wednesday morning. Economists are forecasting a drop in housing starts from June and that building permits will be flat.

That would be bad news for Home Depot, especially as lumber prices have sunk in recent months due to slowing demand. Surging lumber costs had given Home Depot a big sales lift earlier this year.

The rapidly changing environment for all retailers due to the rise of the Delta variant is also making it more difficult for companies to predict future demand.

The federal government reported a bigger-than-expected drop for retail sales in July Tuesday morning. And Home Depot chief financial officer Richard McPhail acknowledged the cloudier outlook during the company’s conference call with analysts.

“There is still a significant amount of uncertainty in the broader environment as it relates to the evolution of the Covid-19 pandemic and the new and spreading variants,” he said. “As we’ve previously shared, we do not believe we can accurately predict how the external environment will evolve and how it will ultimately impact consumer spending.”

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