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Stock Strategist Industry Reports

Rising Rates Pose Low Near-Term Risk to Home Retailers

Affordability could present a larger challenge over the longer term.

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With the United States seven years into its economic recovery, financial leaders’ willingness to raise interest rates appears to be increasing. Since 2010, companies like  Home Depot (HD) and  Lowe's (LOW) have benefited from the recovery of a depressed housing market thanks to a rising wealth effect, improving affordability, and historically low interest rates. However, we expect that as interest rates tick up, the affordability equation could change again, recalibrating the rent-versus-buy equation.

We think housing turnover could remain elevated in the near term, particularly if consumers are given the opportunity to lock in mortgage rates at low levels. Some consumers could attempt to pull forward a home purchase that was being contemplated over the next two or three years to get ahead of rising rates. We expect such behavior to continue to support the stock prices of names like Home Depot and Lowe’s as improvements tend to occur around a sale. As mortgage rates increase over the longer term, the softlines names in our coverage should show more resilience, in our view. Companies like  Bed Bath & Beyond (BBBY) and  Williams-Sonoma (WSM) are generally agnostic to the rent-versus-buy decision and should benefit from higher headship rates as millennials move out on their own, independent of whether these consumers rent or buy.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.