Remodeling's Brightening Prospects, Part 2 of 5comments (3) May 29th, 2011 in Blogs
Remodeling's Saving Grace
Even though remodeling, like homebuilding, saw remarkable growth from 2000 through 2006, its decline during the economic downturn, while record-breaking, still wasn’t as deep as that of housing.
No question: like most industries, remodeling has ridden an economic rollercoaster over the past couple of decades, hitting a high point in home improvement expenditures in 1993 and seeing significant drops in 1990-1991 and 1995. But its buffeting by broader economic turmoil has not included plunges as calamitous as that recently experienced by new-home construction. Part two of “A New Decade of Growth for Remodeling,” a five-part analysis by the Joint Center for Housing Studies of Harvard University, focuses on 2000 through the third quarter of 2010, when remodeling expenditures saw a remarkable (though not record) increase through 2006 and, from 2007 through 2008, their most severe decline in 25 years.
Remodeling and the housing bubble
From 2003 to 2007, the JCHS analysis shows, remodeling expenditures increased by an average of 12% annually, then fell at annual pace of almost 16% from mid-2007 through 2009. Remodeling’s homeowner-spending component alone took a 23% dive during the downturn. Overall, the industry saw a recording-setting decline in client expenditures – although it was nowhere near as severe as the 75% drop in residential construction spending.
Among the key factors in that 23% decline in homeowner spending, the analysis notes, was the drop in the homeownership rate to 67% in 2010 from 69% in 2004 (homeowners tend to spend more on remodeling than owners of rental properties) and, of course, homeowners’ 40% loss of equity, on average, from 2007 to 2010, by which time almost 5% of all mortgaged homes were in foreclosure and almost a quarter were underwater.
Overall, a history of growth
Taking a look at the past several decades, however, Census Bureau data and the JCHS analysis show that the number of homeowners has, on average, increased by about 1% annually, with the share of households electing to spend on remodels tracking within a surprisingly narrow range since 1995: 27% to 30%.
The spending category that took the biggest hit after the bubble burst was for discretionary projects, particularly higher-end projects, which saw a 110% spending increase from 2000 to 2007 and a 23% decline from 2007 through 2009 (versus a 19% decline during that period in overall remodel spending). The top 5% of homeowners – whose properties ultimately saw some of the most substantial drops in equity – accounted for about 60% of expenditures from 2002 through 2007, but only 52% in 2008 and 2009, the JCHS says.
Home-improvement spending by older homeowners tended to hold up better during the downturn because they typically had purchased their homes before the boom and therefore lost less equity during the bust. These homeowners are less likely to follow a do-it-yourself path to remodeling and are more likely to spend on replacement projects (siding, roofing) and system upgrades, including energy efficiency retrofits that might include tax incentives.
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