Remodeling Activity Continues Trending Upward
For years housing analysts have been predicting that the day was nearing when the nation’s volume of remodeling activity would surpass new construction, but home building has been doing so well in recent years that the gap for remodelers has actually widened instead of narrowing even as business has proceeded at a healthy clip, Kermit Baker, senior research fellow at Harvard University’s Joint Center for Housing Studies, told the NAHB Construction Forecast Conference in Washington last week.
Over the past decade, remodeling’s contribution to the annual $450 billion in new construction that accounts for 4% of Gross Domestic Product has declined from under 50% to 38%, Baker said, with average annual growth of 6% trailing behind a 10.2% yearly average for new housing production.
This year’s remodeling market will reach an estimated $275 billion.
Improvements by home owners, which constitute the largest share of the remodeling market, reached an annual rate of $139.1 billion in the third quarter, according to the Housing Center’s Remodeling Activity Indicator (RAI), and appear to be leveling off at an annual growth rate of about 5%.
“Key drivers of home improvement spending — home sales, employment increases and income growth — remain steady, so remodeling spending should continue growing modestly over the coming quarters.”
NAHB Chief Economist David Seiders said that the overall remodeling market should post “real” annual growth in the 2%-3% range going forth even as housing production flattens out following a modest decline.
Ordinarily, Seiders said, remodeling could be expected to follow in the direction of new construction but home owners are sitting on record amounts of equity that can be readily used to make improvements and the recovery from Hurricane Katrina has bolstered demand, as well.
The renter component of the remodeling market, about 25% of activity, “has been pretty darn flat,” he said.
Slicing up 2003’s $138.1 billion home owner improvement pie, Baker said that remodels and additions accounted for $59 billion, or roughly 40%; interior and exterior replacements and replacements and upgrades of systems and equipment took a 35% share, at $54.1 billion; and $25 billion worth of improvements to the property equaled a 20% share.
As home owners take a growing interest in backyard and outside amenities, the latter category accounts for a growing share of the market, Baker said.
Growth at the upper end of the remodeling market has been especially pronounced, Baker said. High-ticket projects in 2003 costing $10,000 or more accounted for a 52% market share, up from 37% in 1995, adjusted for inflation; and households spending $25,000 or more were responsible for a 31% share, up from 16%.
Tracking 63.5 million owner-occupied homes from 1994 through 2003, using 1995 home values, Baker said that major improvements greater than 50% of the home’s value were made to 6.7% of the stock; significant improvements of 10%-50% of home value were made to 39.1%; and modest upgrades of less than 10% but more than $1,000 accounted for 44.1%.
More than 10% of the home owners made no improvements over the 10-year period, “and when these homes turn over, they will likely undergo some significant improvements to make up for the work that hasn’t been done,” he said.
Owner households are typically spending about $2,000 a year on home improvements, he said.
While most major remodeling markets continue to be located in the Northeast and Midwest, where the housing stock is older, top growth markets are emerging in the Sunbelt, Baker said. Among the fastest growers there are Los Angeles and Dallas-Ft. Worth.
Photo by Morris Semiatin
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