A Look at Remodeling’s Drivers

Since August, when the U.S. Census Bureau released its biennial tabulations of The American Housing Survey, the nation’s leading housing economists, have been holed up with all 616 pages of the document, crunching the data for detailed analyses that will ultimately be released later this year.

As of the middle of last month, Gopal Ahluwalia, an economist with the National Association of Home Builders, Washington, D.C., along with his colleagues who study the remodeling market had not completed their examination of the AHS, but he was able to explain the significance of this much anticipated document and how it differs from a similar set of housing numbers that also originates from the Census Bureau, namely the C-50 report.

The American Housing Survey is conducted by the U.S. Census Bureau for the U.S. Department of Housing and Urban Development. The most recent survey was conducted during 2005. And, according to this latest AHS release, the remodeling market generates $260 billion annually. Two years ago, the 2003 AHS tallied the size of the remodeling market at $215 billion. So, the big story regarding the remodeling market that is coming out of the current AHS is the huge growth in remodeling activity between 2003 and 2005. In fact, this period may go down as a high water mark in terms of fastest rate of growth in the remodeling market. The Census Bureau’s other report from which housing data is gleaned — the C-50 — is prepared for the U.S. Department of Labor. It also quantifies the remodeling market, but because its focus comes from the labor side of the economy, the size of the remodeling market has been less. For the first quarter of 2006, the C-50 report put the size of the remodeling market at $232 billion annually. Harvard University’s Joint Center for Housing Studies uses the C-50 report as its basis for quantifying housing activity. The most recent Harvard estimate pegs the remodeling market at $275 billion. The NAHB’s Ahluwalia says there is an effort underway within the Census Bureau to reconcile the differences between the Labor Department’s C-50 and HUD’s American Housing Survey. Until then, those who track the remodeling market must live with its different estimates of overall size in terms of dollar volume of activity.

Remodeling market drivers

Until the professional economists complete their work of making comparisons from one AHS survey to another in order to isolate trend information, it makes sense to take a glimpse of the latest data to simply understand the scope of some important remodeling market drivers and how they fit within the larger housing picture.

In 2005, there were an estimated 124 million dwelling units in the United States; 108 million of those homes are occupied, leaving 12 percent vacant. These account for the homes and apartments that are for rent at any given time (24 percent of the 16 million vacant units); occasionally used homes (17 percent); seasonal homes (25 percent); and those for sale (9 percent). (For further details, see chart on page 27, Occupancy and Units in Building: 2005.)

In the remodeling market, owner-occupied homes are the prime target for services. In 2005, this amounted to 74.9 million homes, including condominiums, single-family homes and manufactured housing units. Of that total, about 56 million are single-family homes. With existing-home sales and mortgage refinancings running very high in recent years, some of the new AHS data provides a good snapshot of the underlying financial position of the nation’s owner-occupied housing. For example, the data shows that the largest percentage of mortgages held were written between 2000 and 2004.

More significantly for remodelers, the AHS captured the number of mortgages where cash was taken out and used on home improvement expenditures. Of 2,375,000 primary mortgages where cash was taken out during the refinancing of the home, about 557,000 used 100 percent of the cash on home improvement projects and nearly all (with the exception of 114,000 not reported) spent at least some of the cash on home improvement. Previous studies had shown that about 30 percent of all cash-out refinancing monies were being spent on home improvement. But the AHS figures are lower, reporting a median of 19.5 percent being spent on home improvement. (See the chart on page 27 for a more complete breakdown of the percentages of cash-out money being spent on home improvement.) Furthermore, the average amount of money being taken out during cash-out refinancings is generally not robust. The median dollar volume extracted was $28,084, while only 200,000 mortgages were used to take out more than $100,000.

Lastly, with home prices rising and the level of homeownership approaching 70 percent among all U.S. households, there has been concern a high percentage of homeowners might be borrowing too much. The median percentage of monthly income spent on housing is a healthy 20 percent, with most monthly income in the 15 to 19 percent category.

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