Unlocking Remodeling Growth

The Bottom Line: Entering 2024, high inflation and tempered Fed rate cut expectations have led to uncertainty in big-ticket remodeling despite underlying fundamentals for growth, such as an aging housing stock and rising household wealth, with many in the industry believing a rebound may not occur until consumer confidence improves and financing costs ease.

Coming into 2024, all eyes were on the Fed, which, at the end of 2023, had penciled in three rate cuts for 2024. Expectations were that lower interest rates would unlock existing home sales and get consumers off the sidelines for big-ticket discretionary purchases and remodels. Higher-than-expected inflation in early 2024 caused the Fed to temper expectations, signaling potentially just one rate cut in the fourth quarter. This has led to speculation that a rebound in big-ticket remodeling may not come at all this year.

Entering 2024, we did not foresee a rebound in big-ticket R&R until later in the year, as homeowners continued to be pressured by affordability. Costs for building products are 40% higher than in 2019. Many in the industry believe big-ticket R&R projects correlate more closely with existing home sales, which have been under pressure over the year’s first half. 

Approximately 87% of outstanding mortgages are now locked in below 6%. While we are past the peak lock-in during Q1 2022, when 92% of borrowers had a mortgage rate below 6%, many households are unwilling to give up these low rates in favor of a different home. We believe existing home sales will remain pressured throughout 2024.

Overstatement of existing home sales to remodeling demand

At John Burns Research and Consulting, our analysis shows that the balance of importance for remodeling is tilting away from recent movers and more toward households that stay put.

Approximately 80% of remodeling is done after a household has been in their home for more than two years. A big part of this story is older households with wealth who are staying in their existing homes longer. Since 2009, the correlation between existing home sales and remodeling has progressively weakened. This is before the Covid-induced pull-forward of remodeling activity post-2020, which saw a surge in remodeling projects during the pandemic.

Our analysis shows that the Covid-induced boost to remodeling was material, driven by more time spent in the home and a wave of cash-out refinancing for large remodeling projects. We estimate that home improvement spending as a share of total consumer spending underwent a large one-time boost. This pull-forward activity subsequently dragged down remodeling spending and, according to our estimates, will be fully exhausted in the second half of 2024, allowing the remodeling market the opportunity to grow again.

What drives home improvement spending

Household wealth in all its forms, including stock market wealth, strongly correlates with spending on large home improvement projects. Despite persistent inflation, homeowners have benefited from rising home equity levels, gains in real personal income and stock market holdings since late 2023.

In our latest quarterly U.S. Remodeling Index, we asked firms what is holding them back from achieving stronger growth throughout the next six months. Professional remodeling firms cited consumer uncertainty as the main reason for weaker growth over the remainder of 2024. The second most cited reason was skilled labor availability. Interestingly, fewer remodelers cited higher financing costs than these two choices. It is very telling that despite soft remodeling activity today, skilled labor availability still ranks as a top concern for professional remodelers.

While the underlying fundamentals of stronger remodeling growth are present, consumer uncertainty around the overall macro economy remains a barrier to unlocking growth. We believe once consumer confidence shows a steady rise from an improved outlook, and financing costs for remodels ease, an uptick in big-ticket remodeling will follow. This is supported by:

• An aging housing stock
• The residual impact of higher household formation
• Lower financing costs coinciding with the Fed cutting rates
• Exhaustion of Covid-induced pull-forward of remodeling.

Commentary on public companies’ recent earnings calls reflects this sentiment. No one is doubting the return to remodeling growth. The timing, however, remains uncertain, as does the macro environment.