Remodeling Market Could Top $359 Billion a Year by 2015
The remodeling market, coming off the strongest five years in its history, will keep up its momentum for the long term, with a growth rate of 5% a year over the next 10 years, the nation’s two leading remodeling economists reported at the Remodeling Show in Chicago last month.
For the near term, however, remodelers can expect to see slower-than-expected growth in 2007 as home owners adjust to changing market conditions.
“The last five years were probably the best five years in remodeling history,” said Kermit Baker, the director of the Remodeling Futures Program of Harvard’s Joint Center for Housing Studies. “There was growing equity, low interest rates. All the forces came together. It was the perfect storm for remodeling. But we are seeing the tide turning a little.”
A slowdown in home construction usually means less spending on additions and alterations. However, maintenance and repairs help buoy the remodeling market. “Remodeling is less cyclical than new construction,” Baker noted.
“When someone has a leaky roof, they have no choice but to fix it,” added Gopal Ahluwalia, NAHB’s vice president of research, who has pioneered studies of the remodeling market for the past 20 years. “Maintenance and repairs will not be affected.”
Home owners tend to customize their homes several years after they purchase, and more than 30 million homes sold in the past five years should continue to feed the remodeling market for several more years — “unless interest rates rise above 7.5%,” Ahluwalia said.
Residential Remodeling Expenditures
(Billions of Dollars)
Source: NAHB Economics — Remodeling Forecast (Preliminary)
More Homes, Aging Homes Point to Long-Term Growth
For the long term, Ahluwalia projected that the remodeling market would grow from $215 billion in 2005, as reported by the U.S. Census Bureau, to a projected $359.1 billion in 2015.
The growing volume of housing stock across the nation, the rising age of existing homes and the increased wealth of a new generation of home owners and renters will be major factors driving the remodeling market during the next 10 years, Ahluwalia said. Total housing stock surpassed 124 million homes in 2005. The median age of those homes is 32.
As housing continues to age, maintenance and energy savings-related remodeling will continue to be in demand, said Ahluwalia.
Of the energy-related materials and products installed in remodeling projects during the past three months, low-e windows topped the list with 86%, followed by insulated exterior doors, 69%; upgraded insulation, 65%; ceiling fans, 59%; argon gas windows, 56%; and high-efficiency HVAC systems, 49%. Other energy-saving products included programmable thermostats, water-saving faucets and fixtures and insulated foundation.
The more affluent will continue to command a larger share of the market and spend more on remodeling over the long term, Ahluwalia said, a trend that has been growing since the early 1990s. Currently, households making $75,000 or more represent 60% of the remodeling market, almost double their impact in 1993.
In addition, 64% of remodeling projects in 2005 were on homes valued at $250,000 or more, compared to only 22% in 1993.
Baby boomers, the wealthiest generation to date, are responsible for a majority of the remodeling projects in the market today, but the post-baby boomer generation influence on the market is growing quickly.
Baby boomers represented 52% of remodeling expenditures in 2005, Ahluwalia said. Those 35-54 spent 22% of the remodeling dollars last year, the second-highest spending age group.
“Generation X and Generation Y will spend more in their lifetime on remodeling than their predecessors,” Ahluwalia said. “They will be wealthier than their parents, and wealth will drive the market.”
Regionally, the strongest markets today are the ones with older housing stock. According to the Joint Center’s Baker, these areas typically include the Northeast and Midwest, yet he believes that a long-term shift towards the Sunbelt should arise in the near future.
Kitchen and bathroom remodeling were the top two types of projects in 2005, followed by room additions, whole house remodeling and window and door replacements.
In the near term, remodeling contractors may face competition from home builders, yet just how many builders will come into the industry remains unclear.
“It always happens when there is a slowdown,” said Ahluwalia. Many builders have relatively few employees of their own and rely on subcontractors. The smaller staffs enable many builders to sit on the remodeling sidelines during a slowdown.
Some near-term competition could also come from home improvement big box stores like Lowe’s or Home Depot. Baker, however, believes that this competition will be limited. These stores, he said, are successful with single-product installations, but as general contractors, they have shown little success.
Multifamily Remodeling Opportunities
The rental market, which accounts for approximately one-third of remodeling expenditures, could be a growth area for remodelers. Rental remodeling ebbed as homeownership increased during the last five years or so, but as the rental market continues to strengthen, multifamily remodeling is expected to increase.
“Multifamily remodeling should grow because so little was spent in the last five to 10 years,” said Baker.
Not Much Consolidation Predicted
Source: Harvard University Joint Center for Housing Studies
Baker said remodelers were the most fragmented of the residential industry players, and he did not foresee major consolidation of the industry in the future.
According to his findings, the number of self-employed contractors, both general contractors and special trade contractors, increased faster between 1997 and 2002 than larger firms with payrolls and employees.
During those five years, the number of remodeling firms grew from a little more than 400,000 firms to 520,000 firms. He said that industry consolidation is not as feasible because remodeling requires customer-specific custom work that cannot be duplicated on a large scale.