The Joint Center for Housing Studies at Harvard University released this week a major report on the home remodeling industry.  The U.S. Housing Stock:  Ready for Renewal examines the effect the Great Recession had on the industry and the nation's housing stock and why this looks to be a promising time for a rebound in both.  The paper also looks at the composition of the industry, the impact of the recession, and factors which contribute to the success of those working in it.  We summarize here those parts of the paper dealing with the current state of the remodeling business and its future prospects.

As the housing market continues to pull out of its prolonged downturn it appears that the remodeling industry is doing so as well.  While the magnitude of the housing bust is well known - a 75 percent drop in housing starts, a 45 percent decline in existing home sales, and a 30+ plunge in house prices, it isn't as well known that residential investment which includes spending in both new home construction and home fell from an average of 5.2 percent of gross domestic product (GDP) during the two decades prior to the Great Recession to an average of 2.8 percent from 2008 to 2012.

The evidence of this underinvestment includes rising numbers of inadequate homes, the aging of the rental stock, and most dramatically the surge in foreclosures, short sales, and underwater borrowers.  These show that many owners lacked either the incentive or the capacity to improve or even maintain their properties.

This suggests both a pent-up demand for new homes and the need for renewed investment in the existing housing stock which has declined in quality over the period.  The number of inadequate homes increased by 7 percent between 2007 and 2011 to 2.4 million units.  Inadequate homes are significantly more likely to be converted to rental units, non-residential uses, become vacant, or be otherwise permanently lost from the housing inventory.

Maintenance and repair spending tends to be more stable than improvement expenditures because property owners are more likely to perform basic upkeep than to upgrade properties.  From 2007 to 2011spending on maintenance and repairs increased about 6 percent, while spending on improvements dropped by 22 percent.

Improvements, however, remain by far the larger market, accounting for two-thirds of industry spending even in these down years.  More than a quarter of that spending was discretionary, i.e. projects that could be deferred, while 50 percent were for replacements such as roofs or HVAC systems, an increase from 30 percent pre-crisis.  Almost 12 percent was for interior upgrades such as to flooring, and the remaining 22 percent was for other property improvements like garages, driveways, and disaster repairs.

One factor driving the downturn in spending on discretionary home improvements was per project expenditures.  Essentially the same share of owners (57 percent) reported improvement projects during the upturn in 2006-07 as during the downturn in 2010-11 but in the earlier period over 650,000 owners spent at least $100,000 on home improvements, and another 3.5 million spent between $25,000 and $100,000. Together, these homeowners accounted for almost 60 percent of expenditures over the two-years.  By comparison, fewer than 3.0 million owners reported spending more than $25,000 on improvements in 2010-11, contributing less than 46 percent of the total.

High end discretionary improvement projects rise and fall with the health of the broader economy while spending on replacements and systems upgrades is much less volatile. The recent cycle was somewhat unusual, however, in that the share of spending on replacement projects and systems upgrades jumped 10 percentage points between 2007 and 2011, with the dollar amount up by almost $2 billion or nearly 3 percent. Much of this surge reflects growing demand for energy-efficient upgrades, driven in part by the availability of state and federal tax credits.

Homeowners looking to make improvements face several challenges.  First is the loss of home equity due to the unprecedented plunge in house prices during the housing crash.  This makes owners feel less wealthy and thus less likely to spend in general and on improvements in particular. Less equity also makes it more difficult to get project financing, especially with tight credit. 

In addition to its direct impact on home equity, lower house prices can also influence decisions to undertake an improvement projects because there is evidence home improvement gives less return on investment when house prices are week.

After hitting a cyclical bottom in late 2009 and languishing near that low for two years, the US home improvement market appears poised for a solid rebound.  The Joint Center estimates that homeowner improvement spending was already climbing at a double-digit pace in the second half of 2012, and the Joint Center's Leading Indicator of Remodeling Activity (LIRA) points to continued gains through 2013.

How rapidly growth proceeds depends on many critical factors: international political and financial events; the ability of Congress and the Administration to effectively manage fiscal policy; and continued improvement in private sector business conditions, leading to job and income growth for US house- holds. The availability of credit to homeowners for improvement projects is also uncertain. And within the extremely fragmented home improvement industry, there is concern that shortages of skilled labor could create bottlenecks in remodeling activity.
The report points to a number of positive signs indication that a firm foundation is already building for renewed growth in home improvement spending.

  • More than 4.2 million distressed homes sold between 2009 and 2012 have already generated a burst of expenditures and with 2.9 million more homes in the foreclosure inventory there should be a pent-up demand for future investment.
  • The population of Americans over the age of 65 will increase by 15.5 million or 40 percent between 2010 and 2020 which should feed a demand for retrofits to existing homes to allow them to age in place. They will be followed by the enormous echo-boom generation which could generate growth in the home improvement market in the 2020s and beyond.
  • In 2011, about a quarter of home improvement projects were undertaken at least in part to increase energy efficiency. Given that homes account for about 22 percent of all US energy consumption, the potential market for and benefits from additional retrofits are vast. Home builders are already reporting that buyers are paying premiums for new homes with green certification. Comparable certification programs for existing homes should also boost demand and price premiums.
  • Momentum is also building in the healthy home movement, which seeks to eliminate the use of toxic materials in home construction and renovation. A new industry is developing around the retrofit activities that can mitigate air pollution and other hazards within the home.
  • The nation's aging rental stock also represents a huge potential market. In addition to the need to modernize older units, there is also an emerging opportunity to convert units that were shifted to the rental market during the housing bust back to owner-occupancy.