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The housing market is cracking and that will hammer Lowe's, analyst warns

Lowe's stock is getting nailed with a downgrade by analysts at Citi on fears that a rapid cooling in the housing market will hammer demand at the home improvement retailer.

Citi analyst Steven Zaccone slashed his rating on Lowe's to neutral from buy on Thursday.

"We see risk of a 2Q miss on same-store sales and EPS vs. Street with the potential to cut FY22 guidance given the weak first half results," Zaccone wrote in a new note to clients. "We believe the buy-side is bracing for a miss and guide-down, but we see less likelihood of a relief rally on cut guidance given the negative overhang of a slowing housing market."

Shares of Lowe's fell slightly in pre-market trading.

Zaccone maintained a buy rating on Lowe's rival Home Depot, however, on the view that sales to contractors (known as pros at Home Depot) will remain strong in the near-term. Lowe's has far less of a presence in the contractor business compared to Home Depot.

"Our core thesis to downgrade to Neutral ($205 target price) is based on a tougher macro backdrop, slowing do-it-your-self consumer, rising promotional risk, and a tougher margin expansion path in a weaker sales environment," the analyst wrote.

The downgrade on Lowe's shares could be the first of many by analysts amid the ongoing housing slowdown and stock prices that have bizarrely stayed afloat. Shares of Home Depot and Lowe's have tacked on 10% and 8%, respectively, in the last month amid a boarder market rally.

Amid rising interest rates and elevated costs for home ownership, sales of existing homes in June tanked 5.4% from May, according to the latest data from the National Association of Realtors (NAR). Sales in June marked a 14.2% drop from one year ago.

A sign is displayed in front of a new housing development in Burke, Virginia, on April 26, 2022. - Sales of new homes fell in the US last month, government data said on April 26, as high prices continued to crimp demand. Sales dropped to an annualized rate of 763,000, seasonally adjusted, less than analysts anticipated and 8.6 percent below the rate in February, which was revised sharply upwards, the Commerce Department reported. (Photo by Stefani Reynolds / AFP) (Photo by STEFANI REYNOLDS/AFP via Getty Images)
A sign is displayed in front of a new housing development in Burke, Virginia, on April 26, 2022. (Photo by Stefani Reynolds / AFP) (Photo by STEFANI REYNOLDS/AFP via Getty Images)

Sales of new homes fell to a two-year low in June.

"We’re going to go through a painful, volatile period," Redfin CEO Glenn Kelman said on Yahoo Finance Live this week (video above). Kelman's cautious tone on housing on Yahoo Finance Live echoes that of Whirlpool CFO Jim Peters just a few weeks earlier.

Furthermore, a key driver of sales at Lowe's and Home Depot — home remodelers — is pulling back as well. The National Association of Home Builders Remodeling Market Index fell a stunning 10 percentage points year-over-year in the second quarter.

“Although most remodelers across the country are still positive about the market," NAHB Remodelers Chair Kurt Clason stated, "a growing number are starting to experience symptoms of a slowdown."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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