Remodeling Market Could Lead 2011 Rebound

Rich Walker
May 1, 2011
COLUMN : Industry Watch | Markets & Trends

It may not be for the best of reasons, but the storm clouds over the housing market may have a silver lining in the form of a brighter outlook for home remodeling and window replacement. Researchers surmise that, in the context of the depressed number of new housing starts, a significant increase in remodeling activity is reflecting a shift toward reinvesting in existing homes over building new ones.

Harvard University’s Joint Center for Housing Studies characterizes the U.S. home improvement industry as “poised for growth” in a report released in January. The report, A New Decade of Growth for Remodeling, is available for free download at www.jchs.harvard.edu.

“As both the economy and the housing market stabilize, so too will homeowner improvement spending,” says Abbe Will, a researcher with the Harvard center. Over the coming years, remodeling expenditures are expected to increase at an inflation-adjusted 3.5 percent average annual rate, below the pace during the housing boom, but sharply recovering from the recent downturn.

In fact, according to BuildFax Residential Remodeling Index, remodeling activity has already returned to pre-recession levels. The index, a new gauge of remodeling activity launched in January by the BuildFax organization, reports U.S. residential remodeling activity derived through related building permit activity filed with local building departments. The BFRRI rose 22 percent year-over-year—and for the 15th straight month—in January to 99.0, the highest January number in the history of the index, which starts retrospectively in 2004. Residential remodeling in January was up year-over-year 17.6 points from the January 2010 Index value of 81.4. All regions except the Northeast posted double-digit percentage gains over their respective January 2010 values (South: 13 percent; Midwest: 28 percent; West: 19 percent). The Northeast continued to lag behind, but for the first time in four years posted a year-over-year gain in January (7 percent).

Further reinforcing the joint center outlook, the U.S. Census Bureau reported in January that a 5.3 percent rise in residential construction spending in December was driven mainly by the remodeling sector, with home improvement spending rising 10.5 percent to $124.4 billion. This increase also coincides with the strong 37.5 percent rise in existing homes sales since August. NAHB research reports that homeowners typically invest in alterations and additions soon after purchase, making changes to suit their individual tastes and needs. An increase in home improvement spending can thus be expected to follow the upward trend in existing home sales.

The center explains that market fundamentals–the number of homes in the housing stock, the age of those homes, and the income gains of homeowners making improvements–all point to increases in remodeling spending. “Metropolitan areas with rising house prices, older housing stocks, higher incomes and home values, and a larger share of upscale remodeling expenditures, such as Boston, San Francisco, and Los Angeles, are well-positioned for an upturn in remodeling activity,” says Eric Belsky, managing director. The only damping factor might be restricted availability of remodeling funding through home equity loans, due to both tighter credit and shrunken home equities.

The Harvard report notes that in the next five years the focus of remodeling spending will shift from upper-end discretionary projects to replacements and upgrades, particularly energy-efficient retrofits such as window replacement. Tax credits for such upgrades, though now decreased since the ARRA-based program expired at the end of 2010, still offer some incentive for window replacement as an energy-saving measure.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (H.R. 4853) signed into law on December 17, 2010, is a tax credit of ten percent of the purchase price of qualified products (not including labor or materials for installation) up to a maximum of $200 for windows and skylights and $500 for exterior doors. These are actually similar to the credit structure that was in place before February 2009. This could increase in influence again, if last year’s ill-fated Home Star program is resurrected.

Bottom line: remodeling contractors appear to have a number of growth opportunities generated by underinvestment in distressed properties, lower household mobility following the housing market crash, changing migration patterns and the rise of environmental and energy-savings awareness. Sounds like a silver lining that might even presage sunnier times on the way.

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.