Vigorous Growth to Follow Current Remodeling Lull
Concerns have grown over the past year about the short-term outlook for remodeling as a result of the cyclical downturn in residential construction, but once housing emerges from the current slump remodeling will be safely on track to repeat through 2015 the solid growth it has recorded over the past 10 years, according to housing analysts at last month’s International Builders’ Show in Orlando, Fla.
Before the downturn, the remodeling market was barreling toward the annual $300 billion mark, reaching $280 billion in 2005, according to calculations by the Joint Center for Housing Studies of Harvard University, almost double the volume of 1995.
Growth in the industry accelerated from 2000 to 2005, said Kermit Baker, director of the center’s Remodeling Futures Program, climbing at a 7.5% compound average annual rate for “the best five years in the industry’s history.” Home owners’ improvements during that period rose about 10% a year and their expenditures for maintenance and repair grew at a healthy annual clip of 6%. Spending on rental properties, by comparison, was less robust, with improvements moving up by less than 4% yearly and maintenance and repair by 2.5%.
Spending on home owner improvements for the five years ending in 2005 was “dominated by a few top spenders,” Baker noted, who had high incomes and valuable homes in rapidly appreciating markets. In 2004-2005, the top 5% of households spending the most for home improvements accounted for 60.7% of remodeling expenditures, up from 45.2% a decade earlier.
At the same time, Baker said, the percentage of home owners making improvements to their homes has been slowly declining — from 29.7% in 1995 to 27.2% in 2005.
And from 2000 to 2005, almost 45% of the nation’s owner-occupied homes — or 31 million — averaged less than $1,000 in annual spending on improvement and maintenance, compared to an average of $2,500 among all owners. “Homes that missed the bull remodeling market,” Baker said, including “even a lot of expensive homes,” will be prime candidates for remodeling in the years to come.
Remodeling Projects Put on Hold
A recent report from Harvard — “Foundations for Future Growth in the Remodeling Industry” — says that the remodeling industry began to cool in late 2005 as the result of a steady rise in short-term interest rates and a slowdown in house price appreciation and equity growth.
“As the housing market correction has progressed, many potential remodeling projects, like many potential home purchases, are being deferred until local housing prices hit bottom,” according to the study.
A slowdown in the existing home market has also put the breaks on remodeling activity because sellers of older properties typically make improvements before putting them on the market and buyers typically make changes to customize them after moving in.
With properties turning over less often and owners remaining in their homes longer, there are direct implications for spending on home improvement. Roughly two-thirds of spending in 2005 by those who had bought their homes within five years was for kitchen and bath upgrades and adding rooms or making other structural alterations. Owners who had been in their homes for 30 years or more, by contrast, made half of their expenditures for replacements and system upgrades. “They are less likely to be changing space, but maintaining the condition of the home,” said Baker.
Further Fragmentation in the Industry
The structure of the industry itself is also changing, he said, moving in the opposite direction of the consolidation that is occurring in residential construction and among building product manufacturers and distributors. The number of remodeling contractors with revenues of $25,000 or more increased more than 30% from 1997 to 2002, from 400,000 to 530,000, he said. Most of this growth came from self-employed individuals, leading to further fragmentation in the industry.
In this increasingly competitive marketplace, Baker observed, remodelers have been able to improve their profits by becoming more specialized, sharpening their expertise and realizing economies of scale at lower revenue levels.
William Apgar, senior scholar at the Joint Center, said that “the professional remodeler portion of the home improvement market is expected to grow 46%, or 3.8% per year in inflation-adjusted dollars, between 2005 and 2015. At the same time, do-it-yourself spending should grow a respectable 3.2% annually and increase almost 38%.”
In the current downturn, he added, “consumers may pull back if they are not clear about where the market is going, but they will still do basic stuff.”
Upscale Projects Out, Mid-Range In
According to survey research by Remodeling magazine and the National Association of Realtors®, the upscale improvements such as major kitchen and bath remodels, room additions and structural alterations that were popular during the recent boom tended to increase the value of the home by close to the value of the remodeling expenditures, Apgar said, with cost recovery in the 90% range.
Starting in 2005, however, survey results showed that mid-range projects, including kitchen remodels and siding replacements, started paying off better for home owners, he said.
Helping to lay a foundation for growth during the period ahead is the rising share of the nation’s housing stock that is more than 25 years old, Apgar indicated. Remodeling expenditures move up steadily as homes reach the quarter-century mark, he said, and retrofitting for energy efficiency is a growing trend, especially in the South, where an increasing share of housing is older and the discrepancy between the energy usage in new and existing homes is high.
The need for repairs in the rental sector, which accounts for one-third of the homes in the U.S. and one-quarter of the value of the housing inventory, will also bolster remodeling activity, he said. The emergence of new construction at the high end of the rental market will also put pressure on upscale rentals built 10 years ago to make improvements so that they can remain competitive with the product just coming out of the pipeline.
An upward trend in the homeownership rate will also help sustain remodeling growth, he said. “There will be 12 million more home owners over the next 10 years,” Apgar said, “and the homeownership rate is still moving up.”
Yesterday’s Luxuries Set the Standard for Today
Generational shifts in the composition of the remodeling market will also be favorable for the industry. “Each generation outspends its predecessor,” Apgar said. “Over time, the image of what’s the appropriate house has gone up” and features that were once considered luxuries — such as hard countertops — are now expected.
“Looking forward, the action will shift from baby boom spending to Generation X,” he predicted. Moving into the prime years for household spending on improvement projects, between age 35 and 45, Gen Xers will see their share of home owner spending rise from 20.4% in 2005 to 27% in 2015,” he said.
Because home building had been “going gangbusters” up until last year, remodeling has actually been on a decline in comparison to expenditures on new construction. It has dropped from almost half in 1995 to 39.7% now, he said, but “it will get back to 47% in 2015.
Gopal Ahluwalia, NAHB’s vice president of research, said that the association’s Remodeling Market Index indicated a decline in activity starting with the fourth quarter of 2005. “The index has been running below average,” he said, but it started “inching up” with the third quarter of 2006.
For more information on remodeling resources at NAHB, e-mail Jim Lapides, or call him at 800-368-5242 x8451.