Lowe's (LOW) second quarter adjusted earnings beat analyst estimates, but missed slightly on revenue. It follows results from Home Depot (HD) which narrowly beat estimates. What do these results show about the state of the housing market? Smead Capital Management CEO Cole Smead joins Yahoo Finance Live to discuss.

“Housing has been probably the most misunderstood part of the economy, looking back over the last 10 years,” Smead says. Smead notes that “tight supply… is causing housing to be strong,” which “no one thought we’d be where we’re at on housing.”

What has impacted Home Depot and Lowe’s “is as interest rates have increased, you just marginally cause people to look less to a home equity line, to revamp their home, and do things of that nature,” Smead explains. But “the one tailwind” that these retailers have is millennials owning homes, as they are “a huge customer base to those retailers,” Smead says. Companies like Home Depot and Lowe’s “have really good secular trends in their favor,” Smead notes.

Video Transcript

BRAD SMITH: What does this say about the broader housing market given that you've got two of the larger DIY plus some of those larger business to business contracts and purchasers that take place for both of these companies?

COLE SMEAD: Yeah. So we've owned Home Depot for years. We think housing has been probably the most misunderstood for the economy looking back over the last 10 years. No one thought we'd be where we're at on housing, where tight supply, even though affordability is terrible right now relative to last decade, is causing housing to be strong.

I think what Home Depot and Lowe's have had to deal with is as interest rates have increased, you just marginally cause people to look less to a home equity line to revamp their home and do things of that nature. That's a bigger component of their life versus just housing supply itself is really more to do with the home builders.

So I do think the one tailwind that Lowe's and Home Depot have and will continue to have for many years to come is we've busted one of the great myths of all time, which was that millennials were never going to buy houses. And now that they own them, that's such a huge customer base to those retailers. And that those DIY companies like Home Depot and Lowe's I think have really good secular trends in their favor.

JULIE HYMAN: At the same time, housing is getting less affordable, right, in part because of what's going on with interest rates in part. We're just not seeing much movement within the existing home sales market because people don't want to sell to pay those rates. So are we going to have a period of more stagnation that's going to continue?

COLE SMEAD: Well, to your point on supply. It's such a healthy environment. In other words, why are high rates not causing housing to fall apart? Because there's no available homes for purchase.

What are some other myths that were out there on housing? You know, baby boomers were going to move out of their houses and go into assisted living earlier on. That never happened. COVID proved that won't happen. They'll live in their houses till they're 90, which would be a shock to what people thought 10 years ago.

So I think there's other trends that are going on in housing that are really causing that tightness. But again, unless you have the higher income from a new job where you're getting paid better to move to a new area, you aren't going to leave your 3% mortgage, 4% mortgage, et cetera. It's only based on income will someone do a move up trade or just a pure need and they have the equity to do it. That's a very healthy housing market.

Go back to '07, you'll find we had the largest supply of homes available for sale that we've ever had. Which housing market would you want to be in? The one that's going to be a nightmare four years or tight supply that looks like it's going to be a bull market for quite a long time. By the way, housing is the only good game in real estate just so we're all on the same page. It's the only game in town doing well.