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Remodeling Poised to Enter Early Phase of Recovery
Trailing closely behind new residential construction, remodeling is expected to reach its cyclical bottom during the current business quarter and begin slowly climbing back toward more normal levels as the year progresses, according to economists speaking at last month’s International Builders’ Show in Las Vegas.
Remodelers will still encounter some reluctance from their prospective customers, who have been rattled by financial losses in the stock market and home equity, they said, but the industry will derive some strength from the housing market as it too slowly finds its way to higher ground. Stubbornly high levels of unemployment, however, will continue to restrain remodeling growth and undermine consumer confidence.
The economists noted that home builders have sought refuge from the extraordinarily steep housing downturn by diversifying their operations into remodeling, which has also taken a tumble, but has held up better than other construction-related sectors. In the meantime, in dollar volume remodeling has moved ahead of the new home market and its lead may continue during the period ahead.
Spending on remodeling fell to an estimated $246 billion last year, down 35% from its cyclical high of $326 billion in 2007, but was more than was spent on new home purchases, said Kermit Baker, director of the Remodeling Futures Program at Harvard University’s Joint Center of Housing Studies. “As the size of the housing stock continues to grow, home improvements and repairs will consistently outpace new construction,” he said.
Based on partial data from the U.S. Census Bureau that only tracks improvements by home owners and omits maintenance and repairs and spending on rental properties entirely, remodeling activity will start seeing positive growth in this year’s second quarter, according to Paul Emrath, NAHB’s vice president for survey and housing policy research.
In 2005 dollars, the seasonally adjusted annual rate of home owner spending on improvements fell below $100 billion in the final quarter of 2009 and will remain at about that level for the first three months of this year before strengthening, reaching $115 billion in the fourth quarter of 2011, Emrath said.
Released on Jan. 21, Harvard’s quarterly Leading Indicator of Remodeling Activity also gave an encouraging signal that home owners are starting to plan more home improvement projects as they see the nation’s economy recovering.
In nominal dollars, the yearly rate of home owner improvements is projected by the indicator to total just under $104 billion during the current quarter, which is 12% below the $118 billion recorded in the same quarter of last year. The indicator shows improvements rising to $110.9 billion by the third quarter, only 3.1% below the rate of spending during the third quarter of 2009.
“Sales of existing homes are on the rise and home price declines are moderating in most markets across the country,” said Baker. “Financing costs are also favorable, although credit availability remains tight for many households.”
When all is said and done, Harvard is estimating that remodeling will have suffered a peak-to-trough decline of 30% to 35%, compared to a 75% slump in home building.
Emrath cited signs that house prices are stabilizing and that the median price of a home is now about 3.2 times the median income, a return to normalcy after skyrocketing to more than 4.5 times income at the height of the housing boom. Prices have also corrected to a normal range in the most overheated markets in Nevada, Arizona, California and Florida.
“The problem now,” he said, “is psychological. People have lived through this and seen the value of housing go down” and are less likely to pursue remodeling jobs if they believe the price of their home is still going down and the value of their remodeling project won’t hold up.
“We are seeing a bit of light at the end of the tunnel,” said Baker. As the economy improves, people “will be less nervous” about making home improvements.
“Owners are realizing this is a great time for remodeling,” he said, “with stable materials prices, and contractors sharpening their pencils on bids and being more accommodating in their schedules.”
Who’s Planning to Remodel
Looking to identify the best candidates among the home-owning population for remodeling jobs, Baker said that older and upper-income households benefitted the most from the long run-up in home prices leading up to the bust, and that higher valued homes didn’t fall as far during the downturn because they didn’t rise as fast during the boom.
The housing downturn “disproportionately affected lower-priced homes where there were more subprime loans,” he said. “Lower-priced homes have fallen faster and their owners were more highly leveraged.”
Citing findings from the Home Improvement Research Institute's Consumer Sentiment Tracking Study, which is based on a national monthly survey of about 13,000 households, including 9,000 home owners, Baker said that the number of home owners planning to spend on remodeling was down an estimated 13.9% in December on a three-month moving average compared to a year earlier.
However, the declines are moderating, he said, and the number of owners with incomes of $100,000 or higher who were planning home improvement projects in December was up more than 25%. In sharp contrast, remodeling plans were down that month for owners with incomes below $45,000 by about 30%.
The survey also found that less-leveraged seniors planning improvement jobs were up by well over 80% in December; spending on professionally-installed projects, while still down, was holding up substantially better than do-it-yourself jobs; and financing projects with cash was gaining in popularity.
Smaller discretionary projects in kitchens and baths are starting to see more signs of life, Baker added.
Diversified Builders and Lead Paint
Emrath observed that remodelers have been seeing increased competition from builders diversifying into residential remodeling. In an NAHB survey of builders in December, 66% said they had diversified into remodeling last year or planned to do so in 2010.
Remodelers are also concerned that they could lose some business from a new rule on lead-based paint from the U.S. Environmental Protection Agency that takes effect on April 22, he said. The higher cost of complying with the rule could provide an inducement for consumers, who don’t know or care much about the new regulation, to decide to do the job themselves or hire a contractor who doesn’t use the required lead-safe practices.
As of now, remodelers are required to contain the work area, refrain from certain practices and follow EPA waste-disposal and clean-up procedures in homes that were built before 1978 and are inhabited by pregnant women or children. Sixty-nine percent of all professional remodeling jobs were in units built before 1980, according to NAHB tabulations of data from the 2007 American Housing Survey.
In October, the EPA proposed extending the regulation to cover all pre-1978 housing, regardless of who lives in it.
Green Remodeling a Plus
In the plus column, Emrath said that demand for green remodeling is receiving a lift from two tax provisions: the American Existing Home Retrofit Tax Credit, 25C, which has been extended through this year and equals 30% of the cost of an energy retrofit, up to $1,500; and from the Wind, Solar, Geothermal and Fuel Cell Tax Credit, 25D, which is in effect through 2016 and covers 30% of the cost, with no cap.
Various state programs are also available, he said, and pending federal legislation could provide as much as $12,000 for improving the energy efficiency of existing homes, though the outcome remains unclear.
In an NAHB survey during the third quarter of last year, 5% of the remodelers polled said they had seen calls for work to improve the energy efficiency of the home during the preceding three months increase significantly and 25% said they had increased somewhat.
The five top products related to energy savings commonly installed during the past three months were: low-e windows (87%), upgraded insulation (70%), argon gas windows (60%), insulated exterior doors (58%) and high-efficiency HVAC systems (53%).
The survey also showed increases in the use of energy-saving materials and products from 2001 until 2009: the remodelers who reported they were using on-demand water heaters grew from 13% to 33% over that period; UV-coated windows increased from 25% to 39%; argon gas windows from 49% to 60%; and high-efficiency kitchen appliances from 34% to 43%.
The top green features adopted by remodelers were:
- Materials and products that are local and easily available, 94%
- Energy-efficient windows, 91%
- Energy Star appliances, 86%
- Alternatives to dimensional lumber, 83%
- OSB rather than plywood, 78%
- Recycled and recyclable products, 70%
- WaterSense fixtures and/or toilets, 61%
- A waste management system, 51%
Forty-five percent of the remodelers surveyed in last year’s third quarter said that 1% to 24% of the jobs they completed in 2009 used the 25C or 25D energy efficiency tax credits; the median of jobs using the credits was 5%.
On another positive note, the extended and expanded home buyer tax credit will increase spending on property alterations this year by $124 million, Emrath said.
For information on remodeling resources available from NAHB, e-mail Kelly Mack, or call her at 800-368-5242 x8451.
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