Those data crazy kids at the Harvard Joint Center for Housing Studies
have done it again; this time with a broad look at the home remodeling
The Joint Center stuff is always fun because they haul in and analyze data
from all over the place. The conclusions are sometimes a little fuzzy; sometimes
there don't even seem to be conclusions, but reading its studies is usually
worth the effort.
The June HJC report starts out by asserting that home renovation
is increasingly a major factor in the U.S. economy. Expenditures for remodeling
projects tripled between 1970 and 1980 and then jumped another 250 percent in
the next decade, a period when, it might be noted the housing industry was first
crippled by double digit interest rates and then hit with a banking failure
fueled collapse in prices. There was recognition, the report states, that home
coupled with housing construction
helped to prevent the 2001 recession from being "even deeper and more prolonged."
According to the report, there are about 120 million homes in the nation's
inventory and this number increases by about 1.5 million each year. The average
American home is 32 years old and, at this age, the inventory is in pretty much
constant need of maintenance and upgrading. Given this, the home improvement
market, which includes both owner-occupied and rental properties, grew to about
$233 billion dollars in 2003 from $153 billion in 1995.
Home owner expenditures account for 75 percent of these outlays and, surprisingly,
only 20 percent of owner occupied spending segment goes to routine maintenance
and repairs. The rest is devoted to do-it-yourself projects
or payments to professional contractors for improvements.
Rental properties account for 25 percent of the total maintenance and improvement
dollars spent, some $57 billion, up from $41 billion ten years ago. This upswing
in landlord spending may reflect the relative weakness of multi-family construction
and the importance and maybe the potential profit of keeping the existing rental
Nearly 45 percent of the dollars spent by homeowners involve changes to interior
space (kitchen, bathroom, or room additions) and 28 percent went to
interior and exterior replacements such as new roofs, flooring, or painting.
Another 11 percent went to upgrading or replacing systems such as built-in
appliances, HVAC, or electric and plumbing work.
The study found that the bulk of the home improvement dollar is spent in the
Northeast and Midwest where housing stocks are older and land for new construction
is scarce. Still, the Sunbelt is picking up speed as its housing stock ages
and urban centers are returning to favor with home buyers. Of the top 25 markets
for home improvements, those experiencing the most growth are in Sunbelt states.
The geographic disparity in home improvement may be narrowing but the high-end
homeowner continues to outspend his less affluent counterparts. Top income households
represent only 25 percent of total home ownership but were responsible for $69
billion or more than half of all home improvement spending in 2003. The highest
income homeowners spent 300 percent more, an average of $3,600 per household,
on remodeling projects than median income households and four times more than
the lowest income homeowners. "Households in the highest income quintile
also accounted for 28 percent of all home purchases and initiated over 30 percent
of all improvement projects," the study states.
High end home owners tend to use professionals to improve their homes. Of the
more than $40 billion spent to improve high value homes in 2003, 34.1 billion
was paid to contractors. Still the do-it-yourself home improvements
market remains strong. Harvard, quoting the American Housing Survey, states
that DIY expenditures accounted for 27 percent of the market; a total of $37.1
billion, in 2003. Harvard comments that this probably understates the value
of the do it yourself market because homeowners are not asked to factor in their
time when calculating these expenditures.
So where is the money for all of this renovating, remodeling, and improving
coming from? Housing price appreciation, construction of bigger and better homes,
and substantial upgrading of existing homes have assisted 75 million homeowners
to build astonishing amounts of equity. In the last 10 years (1995-2004) house
prices have jumped more than 70 percent. Home equity today is valued at 9 trillion
as compared to $4 trillion as recently as 1995. The Harvard study describes
home equity as homeowners' most important asset; two thirds have more
home equity than stock wealth.
Home price appreciation is one of the major drivers of consumer spending and
is undoubtedly fueling home improvement expenditures. HJC estimates that households
spend 5.5 cents out of every dollar of home price appreciation and that this
spending starts within a year of a price surge. Consumers experiencing growth
in stock wealth tend to restrain spending for longer periods, apparently viewing
those gains as less secure. While the study does not state this, it could be
assumed that spending linking to home appreciation constitutes a transfer of
wealth from cash to equity.
The other half of spending growth attributable to housing comes from the surge
in cash-out refinancing. The study quotes Freddie Mac's data that homeowners
cashed out about $333 billion in home equity between 2001 and 2003. The Federal
Reserve Board reports that one-third of the cash out funds retrieved between
January 2001 and June 2002 went to home improvement spending.
So where is the home improvement industry heading. Harvard is hedging its bets.
For several decades, the report states, baby boomers have driven the market
for home improvement. This generation is now aging out of the prime remodeling
years (those of you with gray hair attributable only to plaster dust are free
to debate this) and the following generation of Xers remains an unknown quantity
vis-a-vis its appetite for such expenditures. Further complicating the picture
is the large and growing number of minority and immigrant households "groups
with potentially different home improvement goals."
For now, however, Americans are maintaining and improving their homes and are
pouring the substantial paper appreciation the market has provided back into
their largest - and possibly best - investment.