National News: Home Improvements Weak, But Future Holds Opportunity

A growing number of home builders are diversifying into remodeling hoping to find jobs to tide their businesses over until the home buying market returns, but remodeling over the short term continues to display weakness of its own as home owners pull back from major improvements to their property.

Economists at last month’s International Builders’ Show in Orlando noted that consumers have lost significant amounts of both confidence and wealth and are not in a spending mood. Even for most remodelers, who haven’t taken as much of a drubbing as home builders, the goal will be to survive another difficult year as they prepare for opportunities that will emerge on the other side of the recession.

The Leading Indicator of Remodeling Activity from the Joint Center for Housing Studies of Harvard University projects that home owner improvement spending will be declining at an annual rate of 12.1% by this year’s third quarter, moving to $109.5 billion. Home owner spending on improvements peaked at an annual rate of $141.9 billion in the second quarter of 2006.

The market has seen steady declines since the middle of 2007, although recently the rate of decline has flattened, the Harvard index shows. “While we may be nearing the bottom of the remodeling cycle, there is little to push spending back into a growth phase until the economy recovers,” said Kermit Baker, director of the Joint Center’s Remodeling Futures Program.

Expenditures on owner-occupied units were responsible for 84% of the remodeling market’s $326 billion in activity in 2007. Improvements — as opposed to more routine maintenance and repair — accounted for 70% of the total.

“Despite the gloom today, remodeling is still viable,” said William Apgar, senior scholar at the Harvard Joint Center, even in the absence of conditions favorable for upper-end discretionary jobs. Expenditures in that category grew 23% in 2005 and 7% in 2007, compared to 13% and 6%, respectively, for total remodeling activity.

While the current remodeling downturn is more severe than in previous cycles, the industry is performing notably better than home building. As of the third quarter of last year, home improvements were down an estimated 15.5% compared to a far steeper 52.6% slump for single-family construction.

A new Joint Center study, “The Remodeling Market in Transition,” notes that exterior replacements, system upgrades and disaster repairs — which vary little from year to year — are creating a floor for spending in the home improvement market.

“While upper-end discretionary projects are responsible for most of the volatility in home owner spending, even at their inflated 2007 share, these projects accounted for 30% or less of total expenditures,” the study says. “As a result, even if some discretionary projects were deferred and others were downsized, the impact on overall remodeling expenditures would be much more modest than the decline to date on the construction side.”

Apgar cited the decline in home equity, a major funding source for projects, as a significant factor behind the remodeling slowdown. From its recent $12.5 trillion peak in the final quarter of 2005, owner equity in household real estate has declined by roughly $4 trillion, or almost 32%. Even so, this “will stabilize,” he said. Home owners “still have equity of $8.5 trillion, a lot of wealth,” he said. “But people want to see where the end is before they commit.”

Another drawback for remodeling is the current slowdown in home sales; existing home sales were off nearly 30% in the third quarter of 2008 from their recent peak. “New buyers engage in a lot of remodeling activity,” Apgar said. “The patterns of recent buyers are different from longer-term owners.”

According to the Joint Center, households that relocate spend an average 20% to 25% more on improvements than otherwise similar households that do not move.

Apgar also observed that “there has been a definite decline in the past four to five years in the likely recovery of remodeling expenditures when the house is sold.” During the peak of the boom, some remodeling projects actually increased the selling price of the house by more than $1 for every $1 spent. Average cost recovery declined steadily from 87% in 2005 to just over 67% in 2008, according to Remodeling magazine and the National Association of Realtors®.

The share of cost recovered from home improvement projects typically increases when house values are rising and decreases when values are falling, says the Joint Center report.

The good news, Apgar said, is that those who do make it through another difficult year can expect to have some strong fundamentals on which to build new remodeling business.

The new Joint Center report identifies three sources of demand that are most likely to boost improvement spending once a remodeling turnaround begins to materialize:

  • The increasing need to upgrade the rental housing stock. “Years of underinvestment have left the nation’s rental stock, at an average age of 36 years, in desperate need of improvement and repair,” said Baker. In 2007, almost 10% of rental housing — more than 3.6 million units — were structurally inadequate.“The poor condition of the rental inventory reflects years of neglect,” the study says. While expenditures on the owner- and renter-occupied stock moved in tandem throughout the 1970s and 1980s, their paths began to diverge in the early 1990s. “Average per unit improvement and maintenance expenditures for rental units fell by almost 40% in inflation-adjusted terms between 1990 and 2007, while expenditures on owner-occupied units increased by almost 30%.”

    Spending will be focused on replacements and system upgrades, as well as maintenance, the study says. However, current housing market conditions are likely to delay the process of significant reinvestment in the rental stock. For the time being, the glut of vacant for-sale units that have at least temporarily been converted to rentals is reducing rents and dampening the demand for older units, “discouraging rental property owners from making improvements in the near term.”

  • Ongoing growth in the immigrant home owner market. “Foreign-born home owners, who currently account for more than 10% of home improvement spending, are heavily concentrated in their 30s and 40s, ages when families are growing and changing the use of their home,” Baker said.“Immigrants are key to the future growth of the U.S. home improvement industry,” according to the Joint Center report. “In 2007, foreign-born households spent about $23 billion on improvements on their homes. Their spending levels have grown almost 13% per year since 2000 — well in excess of the 7% among the domestic-born population.”Immigrants are concentrated in gateway cities along the California coast, in Texas and southern Florida and along the Northeast corridor, the study says. “In these high-cost housing markets, owners devote a relatively large share of their incomes to home improvements. In the 12 metropolitan markets where foreign-born home owners spent at least $500 million on home improvements in 2007, the immigrant share of expenditures was well above the national average of just over 10%. In five metro areas — Houston, Miami, San Diego, San Francisco and Washington, D.C. — immigrants contributed more than a quarter of all remodeling expenditures.”

    The report also notes that immigrants have dispersed to an increasingly broad array of housing markets.

  • Emerging interest in sustainable remodeling projects. “If we are going to meet the nation’s energy goals, we have to continuously search for ways to improve the residential built environment,” said Mohsen Mostafavi, dean of the Harvard University Graduate School of Design, where attention to green design is a growing focus in the classrooms and studios. “Maximizing energy-efficiency in existing housing may be one of our greatest challenges, but also one of our greatest opportunities. Consumer demand for sustainable design is on the rise. Architects and planners can lead the way in devising appropriate solutions.”In 2007, home owners devoted more than $52 billion of their improvement expenditures to energy-related projects such as replacing appliances and lighting systems, upgrading their HVAC systems and increasing insulation — up from less than $33 billion in inflation-adjusted terms a decade earlier, the study says.“Motivated by broader environmental concerns, consumers have demonstrated a growing interest in products and projects that meet additional green goals: quality and durability, environmental performance, and safety and disaster mitigation,” the report says.

    In a survey, the Joint Center asked full-service remodelers how frequently they installed green products that met at least one of these criteria, focusing on 10 products listed by the Partnership for Advancing Technology in Housing as having the “most promise for making our existing homes more durable, stronger and more resource-efficient.” The respondents indicated that they were no more likely to install energy-efficient products than products promoting the other goals. About 40% said they regularly or occasionally installed products in each of the four categories. “Some products with energy-saving properties, such as high-performance windows, were used almost universally, while others such as tubular skylights had not yet penetrated most markets.”

    To gauge future trends, the survey also asked the contractors to identify products for which consumers have expressed increased interest. “Here again,” the study says, “there were no major differences between products promoting energy efficiency and those meeting other green objectives.” However, there were wide differences in interest in specific products within each category. For example, among energy-efficient products, “more than 80% of contractors noted greater consumer interest in compact fluorescent lighting, but only half saw greater interest in wireless lighting and temperature controls.”

The Joint Center also notes that when housing markets recover, foreclosed properties will provide opportunities for home improvements. Banks and new owners will renovate and repair these properties and state and local governments will make use of the Housing and Economic Recovery Act of 2008, which allocated $4 billion for the redevelopment of abandoned and foreclosed properties.

Despite today’s downturn, the Joint Center reports that, “Remodeling still rests on a solid foundation with 130 million homes — and one to two million added yearly — in continuous need of maintenance, upgrades, repairs and adjustments to meet the nation’s changing preferences and lifestyles.”

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2 responses to “National News: Home Improvements Weak, But Future Holds Opportunity

  1. I liked your article, especially the section on consumers demand to be more energy efficient. It’s interesting that replacement windows are still the “go-to” retrofit for homeowners looking to green up their house, when compared to other eco-improvements they have the longest payback due to their high price. A good way to make sure you’re not “throwing money out the (replacement) window” is to have a professional home energy audit and find out which improvements will work for you.

  2. Thank you for useful info

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