For the time being as well as the foreseeable future, gone are the days of budget-busting kitchen projects, towering room additions, and whole-house remodeling projects where no expense is spared. There will, of course, be exceptions. But for the most part, remodelers must adjust to new drivers within what remains a fundamentally sound remodeling market — rental housing, immigrant groups and green construction. Thus concludes a biennial report on remodeling published last month by Harvard University’s Joint Center for Housing Studies.
The growth of the remodeling market over the past decade, which hit $325 billion at the end of 2007, has been driven primarily by a housing market that saw house prices rise steadily, hitting annualized rates of 15 percent or more in some markets. This combined with historically low interest rates and a bedrock belief that over time house prices only go one direction — up — fueled an upscale, discretionary remodeling boom that we may not see the like of anytime soon, the report’s authors concluded. (Cygnus Business Media, which owns Qualified Remodeler magazine, is a sponsor of the Remodeling Futures Steering Committee, which underwrote the creation of the report.)
In 2008, as the housing market declined, remodeling retrenched nearly 16 percent. And further declines are expected in 2009, the report concluded. But to a large degree, the old fundamentals of the remodeling market have “effectively put a floor under expenditures.” Despite the banking crisis and very low levels of consumer confidence relating to rising unemployment levels, there remains a stock of 128 million existing homes that is on average 33 years old. This stock “has an ongoing need of maintenance, component replacement, and adjustments to meet changing preferences and lifestyles. With 1 to 2 million homes added to the housing inventory each year, future growth in home improvement activity is assured,” the report states.
Between 1995 and 2007 the number of immigrant households in the United States rose from 9 million to more than 15 million. As they begin to establish themselves here, patterns show that they move out of rental housing and into homeownership at rates roughly equivalent to U.S.-born workers. Thus, a growing share of home improvement activity will come from these groups. In 2007, this group accounted for about $23 billion in home improvement spending. On average their spending is increasing at double the rates for U.S. born households. One reason for this is the average age of the foreign born head of household tends to be younger, skewing toward ages when families are typically growing and space is at a premium.
Another bright spot of the remodeling market is the rental housing market. Over the past year rents have stabilized and have even grown in some areas to accommodate new households that are unable to buy new houses in the current climate. This stronger demand will certainly translate into greater investment into the nation’s stock of rental units which now has an average age of 36 years, more than three years higher than owner-occupied homes. Spending in the rental sector will center on replacements and systems upgrades.
Green, sustainable and energy-efficient remodeling holds much promise for the long term as well. Sharp fluctuations in energy costs have driven many to consider new windows, insulation, house wrap and new siding along with higher efficiency mechanicals as a way to lower their costs of living over the long term. In 2007, homeowners devoted $52 billion to energy-related projects, up from less than $33 billion (adjusted for inflation) in 1997. New surveys also show that consumer interest in sustainable building practices is broad based and growing. “Motivated by broader environmental concerns, consumers have demonstrated a growing interest in products and projects that meet three green goals (beyond energy efficiency): quality and durability, environmental performance, and safety and disaster mitigation,” according to the Harvard report.
The most promising bellwether for the remodeling industry is that over the long term, all of these factors will be supported by a strong pace of household formation, totaling about 14 to 15 million over the next 10 years. Most will need to be accommodated in existing housing.