Harvard: Specialty Firms to Thrive

Spending on home improvements by homeowners is expected to increase at a 3.7 percent inflation-adjusted compound annual rate over the next decade according to a new report released by the Remodeling Futures Program of the Joint Center for Housing Studies. After strong growth earlier this decade where low financing costs and strong returns to house values encouraged upper-end remodeling projects, spending reached $280 billion in 2005. Recently, the remodeling industry has softened.

“The 2006 slowdown in the broader housing sector was reflected in the remodeling industry, with many homeowners putting their improvement activity on hold until the market stabilizes,” explains Nicolas P. Retsinas, director of the Joint Center.

Retsinas adds, “When the industry emerges from its current slowdown, investments in older homes that missed the last round of home improvements, the desire for energy-efficiency retrofits, and growing pressure to upgrade the rental stock will ensure a healthy recovery.”

Foundations for Future Growth in the Remodeling Industry, the most recent report in the Improving America’s Housing series, also addresses changes in the structure of the remodeling industry. Despite recent industry concentration, remodeling firms remain very fragmented, as self-employed contractors not only account for a majority of businesses in the industry, but also for most of the recent growth. In lieu of consolidation, many remodeling contractors have become more specialized. Among the larger companies, specialization has led not only to stronger revenues, but also to more stable receipts. “By specializing, remodeling firms can achieve efficiencies even if their revenues do not reach the levels of traditional scale economies,” notes Kermit Baker, director of the Remodeling Future Program.

The recent slowdown in home sales means owners are staying in their homes longer. This will change the composition of home improvement spending. “Recent buyers often focus on updating their kitchens and baths as well as adding rooms or making structural changes,” remarks Amal Bendimerad, a research analyst at the Joint Center. “Given that their use of space is already well established, longer-term owners make different spending options, choosing to maintain the condition of their homes.”

Also, the age of the nation’s housing is increasing. With two-thirds of homes now at least a quarter century old, growing numbers are in age ranges where improvement spending traditionally is high. Rising home energy costs also are causing homeowners to put energy efficiency near the top of their remodeling concerns. Finally, given the push for homeownership in recent years, rentals have seen declining levels of investment. Growing demand for upper-end apartments has already encouraged more spending on these units.

Increases in the numbers of households and in per household expenditures on home improvements, especially as the high-end market segment returns, ensures solid growth in remodeling activity over the coming decade. However, the mix of remodeling demands will be reshaped by immigrants, seniors and nonfamily households, thereby producing a more sustainable pace of growth. Homeowner spending on remodeling projects is projected to increase 44 percent between 2005 and 2015. “The professional remodeler portion of the home improvement market is expected to grow 46 percent, or 3.8 percent per year in inflation-adjusted dollars between 2005 and 2015,” notes William Apgar, senior scholar at the Joint Center. “At the same time, D-I-Y spending should grow a respectable 3.2 percent annually and increase almost 38 percent.”

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