Preston Press & Charter, November 2007
Small Dip Helping to Improve Health of Remodeling Market
— Nation’s Building News, a publication of the NAHB
Looking on the bright side, the current slump in remodeling activity will gradually lead back to a healthier market than existed at the height of the housing boom, when big spenders accounted for a disproportionate share of home owner improvements.
In 2005, 5% of the households remodeling their homes accounted for 60% of total market activity, which was highly concentrated and not healthy over the longer term. A revival of smaller-scale projects and a movement to greater household participation is healthier for the industry, and more sustainable.
Following the downward path of the overall housing industry but not nearly as precipitously, remodeling should resume growth in 2009 coinciding with a turnaround in housing sales and starts. With market conditions back to normal, the annual increase in remodeling volume should be in the traditional 6% to 7% range through 2011.
Despite easing in owner remodeling spending beginning in mid-2006 and continuing into this year’s first quarter, the latest period for which statistics are available from the U.S. Census Bureau, the industry is profiting from an economic tailwind, as the expansion of the nation’s economy continues, generating jobs and income.
Traditionally, remodeling does better during expansions than recessions. Since 1990, the home remodeling market, which is now close to $300 billion a year, showed an average annual increase of 6.7% when the economy was growing but only 2.3% when it was in decline.
In addition, remodelers don’t have to contend with the sizable inventory of unsold homes that has been troubling builders.
On the negative side, remodeling contractors have been experiencing a significant slowdown in revenue. According to Qualified Remodeler magazine, the top 500 contractors reported a 4.7% median annual rate of revenue growth last year, down from 7.5% in 2006 and 12.5% in 2004. There may be further erosion during the next two years.
Also, in today’s down housing market, home owners may be more concerned about over-improving. More routine improvements and replacements have become stronger than big kitchen and bath overhauls.
According to the latest annual survey by Remodeling magazine and the National Association of Realtors® on the cost of remodeling projects and the percentage of those expenditures on improvements that are recouped when the home is sold, the trend has been down in the last two years — declining from a national average of 80.7% in 2005 to 75.5% in 2006 and 70.0% in 2007.
This year’s study also found that mid-range improvements and replacements are generally having better payback today than upscale projects. For example, home owners are recovering 68% of the cost of upscale bath remodels, compared to 78% of mid-range bathroom improvement jobs.
Accounting for the biggest share of owner-occupied housing remodeling expenditures in 2006, citing the Census Bureau:
· Households in the 35 to 54 age group accounted for 48%, followed by those 55 to 64, 23%.
· Work on homes valued at $250,000 or more accounted for a disproportionate 67%; only 32% of all homes were this expensive.
· Homes acquired between 1990 and 1996 accounted for a 66% share of the remodeling volume.
· Owners with household income of $75,000 or more were responsible for 65% of the volume; only 31% of home-owning households had income of $80,000 or more.
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