Opposing trends will hold remodeling growth in check
Monday, May 06, 2019
Recent first quarter industry reports show signs that the pace of remodeling services growth has begun to taper off. While forecasters do not expect demand to slip into negative territory for the foreseeable future, they do project that, contrary to the robust increases remodelers experienced in 2017 and 2018, growth over the next several years will be more modest.
In part, this is because conflicting market forces will constrain demand.
According to the National Association of Home Builders (NAHB), year-over-year growth in residential remodeling spending fell from a high of 19% in 2017 to almost half that, 10%, in 2018. The NAHB predicts remodeling spending for owner-occupied single-family homes will increase 1.6% this year and another 1.1% next year, for an annual growth rate of 4% and 2%, respectively.
Reflecting that trend, the NAHB reported that its Remodeling Market Index (RMI), which gauges remodeler confidence, fell by three points in the first quarter of 2019 compared to the previous quarter. Remodelers indicated a decline in both current and future market conditions. Especially affected were demand for major additions and alterations (down 7 points) and shrinking project backlogs (down 5 points).
Among the reasons cited by the NAHB for the weaker activity are declining home price appreciation (which means less equity for homeowners to tap for improvements), low volume of existing home sales (and thus fewer homes trading hands, which prompts either sellers or buyers to remodel), and the rising costs and scarcity of labor and materials (prompting remodelers or clients to delay projects). There are signs that sales of existing homes may improve in the second quarter, which would likely generate more business for remodelers.
In addition, a new report from the Joint Center for Housing Studies at Harvard University (JCS), Improving America’s Housing 2019, identifies several other trends that may temper the growth in demand for remodeling services in the coming years. For one, the report points out that following the Great Recession spending on home repair and renovation projects accelerated as investors picked up foreclosed properties or converted homes to rental units.
Plus, as the economy gradually recovered, many homeowners undertook improvements that they had been putting off for lack of resources. Most of those homes have now been repaired or renovated. Also, the decline in homeowner mobility, due to rising home prices and the aging of homeowners, means fewer existing houses are trading hands.
The report also mentions some positive trends that may help to counterbalance the negative ones. The authors point out that as more owners choose to age in place, they will need to make modifications or improvements to maintain the homes and safety.
As millennials continue to enter their 30s, a greater number of younger households will be formed and will be in need of housing. Expanding options for how homeowners can borrow against the equity in their home will make it possible for more of them to pay for projects.
Yet, these positive trends are already encountering headwinds. A recent article for HousingWire relates that fewer owners are tapping into their home equity. In the last quarter of 2018, only 1% of available equity was leveraged, the lowest share since 2012.
Among those decreasing their use of home equity are older homeowners, who are reluctant to take on more debt just at the time that they are thinking of retiring, home prices are going down, and the cost of borrowing is going up. As for those younger buyers, the latest ValueInsured Modern Homebuyer Survey found that less than half of millennials believe buying a home is a good investment, down from three-quarters two years ago. Many of those who want to buy a home do not have the means to do so.
Trends, of course, can shift. For now, however, these countervailing forces indicate that while demand for remodeling services will remain positive, different forces than those of the previous several years will constrain growth to a more modest level.
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