Austin Title | Will 'golden age of remodeling' persist with economy,…
| Aug 24th, 2023

Will 'golden age of remodeling' persist with economy, housing-market slowdown?

Remodeling projects were a staple of the pandemic for many homeowners. That activity is starting to wane, but some experts say activity could pick up again in the coming years. IMAGE PROVIDED BY GETTY IMAGES (ARPAD BENEDEK)

By Ashley Fahey – Editor, The National Observer: Real Estate Edition, The Business JournalsAug 23, 2023

Home-remodeling activity, which boomed during the height of the Covid-19 pandemic, is beginning to taper off from what experts say was unsustainable growth, but current conditions in the housing market may ultimately provide medium-term tailwinds for the sector.

Harvard University's Joint Center for Housing Studies' most recent Leading Indicator of Remodeling Activity, a quarterly assessment of future demand for remodeling projects, is projecting a decline for remodeling activity beginning early next year. Its forecast also calls for activity for the current year to end at a 3% annual growth from the previous year, a deceleration from pandemic years — where double-digit annual growth was typical.

Abbe Will, a senior research associate and associate project director of the remodeling futures program at Harvard's JCHS, said there's historically been a strong correlation between existing home sales and remodeling activity.

With existing-home sales falling yet again nationally in July — down 2.2% from a month prior and 16.6% year over year — it's expected the persistent slower rate of home sales will contribute to a slowdown in the remodeling market starting next year.

"It's not as gung-ho as we’ve seen over the past several years, in terms of homeowner activity, but we’re still expanding this year," Will said. "I think part of that is very much the residual impacts of (home) purchases over the past several years."

Annual spending on homeowner improvements and repairs is expected to decrease from $486 billion through the second quarter of this year to $457 billion in the coming four quarters, according to the JCHS.

Sentiment inside the industry is becoming somewhat more pessimistic, too. The National Association of Home Builders/Westlake Royal Remodeling Market Index, which surveys professional remodelers on current and future conditions, declined two points in Q2 compared to the prior quarter, coming in at 68 on a 100-point scale. Still, any reading higher than 50 suggests more remodelers view remodeling market conditions as positive than poor.

Broader economic conditions could be cause for concern

Consumers' savings built up during the early days of the pandemic are starting to recede and debt is piling up. Total household debt rose by $16 billion — to reach $17.06 trillion — in the second quarter of 2023, according to the Federal Reserve Bank of New York. It also found credit card balances rose by $45 billion, to $1.03 trillion, last quarter.

Major retailers that've reaped the benefits of home remodeling, renovations and do-it-yourself projects during the pandemic are also seeing demand fade. After three years of record sales, Atlanta-based The Home Depot (NYSE: HD) reported earlier this month sales for the three-month period ended July 30 were 2% lower than the same quarter last year.

Another home-improvement retailer, Mooresville, North Carolina-based Lowe's Cos. Inc. (NYSE: LOW), reported Wednesday morning its total sales in the second quarter were down 9% from the same three-month period in 2022, attributed to lumber deflation and lower DIY discretionary spending.

Still, a lot of homeowners have enjoyed significant gains in home equity in the past few years, when median home values skyrocketed during the white-hot pandemic housing market. Will said that by JCHS estimate, the typical U.S. homeowner gained $125,000 in home equity between 2019 and 2022.

"That’s certainly helping keep the (remodeling) market going this year and potentially staving off worse declines next year," she said.

The JCHS is forecasting a 6% decline in remodeling spending in 2024 compared to spending in 2023.

But rather than using home-equity lines of credit, or HELOCs, or other financing mechanisms to pay for remodeling projects, research by the JCHS suggests homeowners are still relying on cash and savings to pay for most of their home-renovation projects, Will said.

HELOC activity peaked in 2022 — to the highest level seen since the first half of 2007 — but dropped during the first half of 2023, according to CoreLogic Inc. In the first six months of 2023, lenders initiated more than 645,000 new HELOCs, representing almost $98 billion. That's about a 32% reduction in amount on a year-over-year basis, according to CoreLogic.

Todd Tomalak, principal of building products advisory at Zonda Inc., said it appears a lot of homeowners who've opened HELOC accounts in the past year or so haven't yet pulled out that equity. That suggests owners could be waiting to see what goes on with the economy to tap into that equity later, potentially to use on a major home renovation.

Long-term room for growth

While a slowdown in remodeling activity is underway and is expected to continue short term, as the economy tries to regain its footing, those who closely track the industry see room for growth in the medium to longer term.

A Zonda survey of homeowners found more homeowners who've bought in the past two years are dissatisfied with their homes, based on categorizing responses by how long owners have lived in their current homes. But with existing homeowners having locked in very low mortgage rates during the pandemic — and the 30-year fixed-rate has risen to higher than 7% in recent weeks — not to mention limited inventory, renovating and remodeling current homes is widely seen as a more viable option than moving to a higher-quality home.

"(People bought) the wrong home with the wrong features and the wrong school district, and it’s festering underneath," Tomalak said. "It's a set-up for one of the strongest bounces the industry has seen, once we see the industry stabilize."

In Tomalak's view, the correlation drawn between existing home sales and remodeling activity is "grossly overstated," as that trend line is also influenced by other economic factors, such as incomes declining or credit collapsing.

While recent movers (classified as those who've lived in a home for two years or less) spend about 30% more on home-improvement projects than homeowners in general, 90% of homeowners who remodel their properties are outside of that recent-mover window, according to Zonda research. That means, Tomalak said, if the entire housing market were locked up for two years — if no homes sold and everything else economically held steady — remodeling spending would decline by only about 3% to 4%, by Zonda's estimate.

Additionally, in the next two years, the count of homes 20 to 40 years old will be 20% higher than the remodel boom seen in the 2000s, according to Zonda. Homes of that age tend to see 15% to 20% more renovation projects than the average U.S. home.

"That’s part of the reason why this is the golden age of remodeling," he said. "If (homeowners) can’t move out of their home and can’t find the right home, we run into a situation of more obsolete homes with more equity."

Other trends influenced by things like demographics and climate change will likely have owners investing more in their homes, too, in the coming years.

Will said that as baby boomers age up and a growing number decide to stay in their homes, mobility-related home improvements will gain market share. Additionally, investments in energy efficiency and performance are expected to grow, buoyed by new federal incentives and rebates. Finally, Will said, as weather events become more severe and frequent, home improvements to help mitigate the impact of disasters will become a growing part of the market.

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