The remodeling market has experienced an epic correction over the past two years that will significantly change the fabric of the business, a Harvard study shows. The good news is that macro-economic factors, along with the impetus of government stimulus, points to a recovery in remodeling spending in the second half of 2009.
Since the peak of $147.4 billion in the second quarter of 2007, spending on remodeling has dropped to approximately $122.65 billion in the second quarter of 2009. The $25 billion decline has been driven by the magnitude of the housing correction: the drop in home sales and prices has reduced homeowner wealth by 35% and shifted the value of their equity from close to 60% of home values to less than 45% of home values. Reduced turnover and reduced value, coupled with the pressure on household incomes created by increased joblessness, has curtailed the number of high-end and discretionary remodeling projects.
During the housing boom, remodeling was driven by the growth of high-end discretionary projects. As the accompanying chart shows, those types of projects accounted for 30% of remodeling spend in 2007, compared to 20% in 1995. The drop in home values creates a strong disincentive for investing in high-end discretionary projects which are unlikely to significantly improve the value of the home.
Harvard’s near-term forecast identifies a bright spot, however. The impact of the government stimulus plans, coupled with a modest recovery in the economy, will begin to drive increased activity in remodeling late in 2009 and into early 2010. In fact, Harvard estimates that the impact of the Federal Foreclosure Relief Plan will amount to $2.6 billion in additional home improvement spending.
There will be some basic difference in the geography and the focus of remodeling projects in the recovery, according to Harvard’s 2009 study, The Remodeling Industry in Transition.
With the length of time people will spend in houses increasing, the types of remodeling projects that receive investment will change. Long-term owners spend relatively more on exterior replacements and disaster repairs, while new owners invest their remodeling dollars in new room additions and property improvements. (Spending on kitchen & bath projects is relatively even between the two groups of home owners.)
In addition, key areas of focus for remodeling are likely to shift to systems and equipment, as homeowners look to take aging housing stock and make it more energy efficient.
A key driver of the geography of remodeling will be driven by housing values. Research shows that homeowners spend more money on home improvements when property values are increasing. This suggests that markets that have experienced precipitous drops in home values, such as Phoenix and Las Vegas, along with sharp declines in the turnover in homes will not experience significant rebounds in home improvement investment. Markets that begin to experience increases in home appreciation will see more significant shifts in remodeling investment.
A final note about growth markets: Immigration is an incremental driver of household formation and remodeling investment. Those markets with a healthy influx of immigration, along with a economic infrastructure that can support more labor, have better mid-term prospects for growth in remodeling than do markets lacking these characteristics.
You can find the report at this link.
