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Fastest Growing Remodeling Markets Located Primarily in the Sunbelt

With the nation’s residential remodeling market fast approaching an annual volume of one-quarter of a trillion dollars, Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, noted several trends that are changing the industry at a time when it is poised to continue the steady real annual growth of roughly 3% characterizing the past 10 years.

The remodeling market has become increasingly dominated by home owners, who have been contributing about 75% of all remodeling expenditures, and 80% of that spending has been on improvements and only 20% on maintenance and repairs, according to a new Joint Center report, “The Changing Structure of the Home Remodeling Industry.”

Home owners undertake remodeling projects to modernize or otherwise improve the livability of their homes, and Baker said that 45% of spending for home owner improvements — or $60 billion of the almost $140 billion spent in 2003 — involves changes to interior space such as kitchen and bathroom remodels and additions, other room additions and other structural additions.

Replacements to exteriors (including roofing, siding, windows and doors) and interiors (such as flooring, wall finishes and ceilings) represented about 28% of the home owner spending on improvements in 2003. The remaining 18% went toward general improvements to the property, such as driveways and retaining walls.

Although home improvement activity has been concentrated in the Northeast and Midwest, where the housing stock is older, Baker noted that homes built in the 1960s and the 1970s in the Sunbelt are now reaching their prime remodeling age. Of the nation’s top 25 markets for home owner improvements, the areas that experienced the most growth in 2003 tended to be in the Sunbelt, he said.

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The value of remodeling permits in the South and West increased at a double-digit pace in 2003, but only about half that rate in the Northeast and Midwest, according to the Harvard report

Robust Sunbelt markets for home improvements in 2003 included: Miami, up 38.8%; Phoenix, up 35.8%; Los Angeles, 34.5%; San Diego, 21.4%; Tampa, Fla., 18.8%; and Atlanta, 8.9%. Among major Sunbelt markets, only Dallas-Ft. Worth and Houston trailed down, by 13.3% and 8.9%, respectively.

Over the past decade, home owners on average spent about 10% of the 1995 value of their homes on improvements. However, 44% reported spending between 10% and 50% of their home’s market value, and 6.7% spent more than 50%.

The timing of expenditures can explain the divergence of these spending patterns, according to Baker. “Improvements often come in a flurry,” he said. “Having recently done another project, the ‘while we’re at it’ syndrome” occurs. He added that, “Home owners focus on the most serious eyesore. Once it’s corrected, another eyesore becomes evident.”

Baker noted that the nation’s remodeling contractor base continues to be fragmented. “While the top 10 U.S. home builders doubled their mid-1990s market share to over 20% of all homes sold in 2003,” the Harvard report says, “the top 10 remodeling firms that year captured just 1% of home owners.” The country’s top 500 remodeling contractors accounted for less than a 4% share.

Small companies may be better poised to withstand downturns in the markets and to meet local demand, the Harvard report says, but it notes that “small contractors are increasingly out of step in an industry that is becoming more and more specialized” and that is being driven by home owners who are looking for upscale improvements that often involve complex jobs requiring skilled project management.

“Manufacturers are responding to this demand by rapidly introducing a host of new product offerings,” the report says. “For their part, product distributors have begun to market to narrower customer segments and tailor their services and inventory mix accordingly. These changes leave small remodeling contractors alone as generalists in an environment that is rapidly moving toward specialization.”

NAHB analyst Gopal Ahluwalia said that about one-third of remodeling work done by professional remodelers is subcontracted today, compared to less than 10% in 1980. By comparison, 60% of the work is subcontracted in new construction.
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