After the latest boom-bust cycle, remodeling is returning to normal growth patterns.
By Stephani L. Miller
There's good news for the remodeling industry, according to Harvard University's Joint Center for Housing Studies (JCHS): the next decade will yield solid growth and many new opportunities. A major JCHS report released last week, "A New Decade of Growth for Remodeling," forecasts a new remodeling decade devoid of the ecstatic highs and dismal lows experienced in the past 10 years.
Steady Growth Projected
Spending on home improvement will increase as the housing market and the broader economy both stabilize. In the short term, downward pressure on home improvement spending—notably from the large numbers of foreclosures and weak housing prices—will not prevent strong remodeling growth in 2011, according to the JCHS' latest Leading Indicator of Remodeling Activity (LIRA). After a surge in activity early this year (peaking around 12 percent), home improvement spending will slow down in the third quarter to a respectable annual growth rate of 6.5 percent ($123.5 billion).
Longer term, the JCHS report predicts steady growth—not dramatic gains—in home improvement spending. While the remodeling market will recover from its 12 percent drop since 2007, expenditures will increase from 2010 to 2015 at an inflation-adjusted average annual rate of 3.5 percent. A number of market conditions will support growth, including the number of homes in the housing stock, their age, and projected homeowner income gains, the report notes.
Remodeling spending is typically concentrated among several metropolitan areas where high incomes and high house values tend to be the norm, according to the JCHS. Over the past decade, the top 35 metro areas (which include San Diego, Phoenix, Houston, Milwaukee, Cincinnati, and Baltimore) accounted for nearly 55 percent of home improvement spending, and the top 10 metro markets accounted for 31 percent.
Homeowners in higher-spending metro areas spent on average twice as much per year on home improvements than those in low-spending metro areas. Metro locations where house prices are stabilizing—and that have older housing stock, higher incomes, and higher house values—will recover fastest and experience stronger growth in remodeling activity than areas where house prices continue to decline, that are overbuilt, or have lower household incomes, predicts the JCHS.
Changing Project Types and New Opportunities
Homeowners' motivations for remodeling have changed during the recession, and the JCHS predicts that growth and composition of home improvement spending through 2020 will resemble that of the late 1990s: moderate. In the coming decade, remodeling will rely more on smaller, necessary upgrades and replacements rather than on upper-end discretionary projects.
About two-thirds of the growth in homeowner remodeling spending from 2010 to 2015 will come not from all the new homeowners who will emerge, but from an increase in spending per household, especially among the 55+ age group. This demographic will begin preparing their homes for retirement and aging in place, and the JCHS projects a particularly strong market for such remodeling services.
Homeowners who were forced to defer maintenance or basic improvements during the recession will drive spending, along with purchasers of foreclosed homes requiring maintenance and replacements, rather than by owners looking to improve their homes' resale values.
The balance of project types shifted during the recession toward necessary improvements, replacements, and system upgrades and away from discretionary projects. From 2007 through 2009, the share of all discretionary project types declined 3 percent, while the share of spending on exterior replacements and system upgrades increased by about 3 percent. Spending on upper-end discretionary projects, such as luxury kitchen and bath remodels or major room additions, dropped dramatically (nearly 23 percent) during the recession after skyrocketing by 110 percent during the housing boom. Going forward, homeowners are likely to focus on necessary improvements and system upgrades that have longer payback periods.
Homeowners will remain concerned about energy costs, and spending on energy efficiency upgrades and other green remodeling projects will grow. Even during the worst of the recession, the market for energy-efficient upgrades and replacements remained healthy compared with other types of replacements or improvements, thanks largely to federal tax incentives for energy retrofits, according to the JCHS report. From 2009 to 2010, improvement projects that included green features increased slightly, despite the overall decline in activity, from just under 25 percent to more than 28 percent.
Reduced household mobility, whether by choice or circumstance, will encourage homeowners to plan for the long term and focus on improvements that will accommodate their lifestyles for years to come. While low mobility typically contributes to a long-term decrease in improvement spending, current conditions may offset some of the usual negative effects, the report notes. Owners with locked-in low mortgage rates may choose to upgrade their current homes rather than move, and those that intend to remain in their homes long term are more likely to make improvements such as roof replacements, HVAC system upgrades, or energy-efficient window replacements.