The national pastime is no longer baseball, nor is it any other sport, entertainment, or cultural activity. Instead, it is home improvement, according to a study by Harvard’s Joint Center for Housing Studies.
Consumers spend more money fixing up and upgrading their homes than they spend on several other major industries, including clothing store sales or legal services. In fact, homeowners’ spending on remodeling now surpasses the expenditures in the commercial and public works construction categories. In all, remodeling expenditures accounted for more than 2 percent of the U.S. economy in 2003.
As of the second quarter of 2005, U.S. homeowners had spent $133 billion on home remodeling and repairs over the past 12 months. This is an increase of 4.5 percent from the same period a year earlier, according to the center’s latest figures.
This remodeling boom is the logical result of the convergence of five forces:
The growth in home ownership. As we noted in Trend #5 this month, more than two-thirds of Americans now own the homes in which they live.
The aging of the nation’s housing stock. The 120 million homes in the country have an average age of 32 years, which means they need constant repairs to keep them functional, as well as aesthetic upgrades to keep them up to date.
The availability of cheap credit. Record-low interest rates have allowed homeowners to borrow inexpensively to fund remodeling projects. The net growth in second mortgage debt nearly doubled in 2004, to $178 billion.
The surge in home values. As property values have soared, homeowners’ equity has increased. Between 2003 and 2004, home equity increased from $8.7 trillion to $9.6 trillion. In 2004, homeowners cashed out $139 billion of that extra equity to finance their spending on home remodeling, luxury goods, and other expenses.
The growth in high-income households. While remodeling is increasing across all income brackets, almost two-thirds of the growth in spending since 1995 can be attributed to people with household incomes of $120,000 and up, according to the Harvard center’s director, Nicolas P. Retsinas.
While home improvements can increase the resale value of a home, returning $2 for every $1 invested in some markets, a growing number of homeowners are updating, upgrading, and upsizing their homes with no intention to sell. For people in this category, the goal is not to make a quick profit, but simply to add the latest amenities to increase their quality of living and to keep up with their neighbors. The fact that home values have risen so sharply also means that it is less expensive to remodel one’s current home than it is to buy a new house.
The most popular remodeling projects are high-end improvements, including room additions and kitchen and bathroom upgrades. In 2004, Americans spent $47 billion to remodel their kitchens, up 11 percent from the previous year, and $24 billion to renovate their bathrooms, up 7 percent.
Among the luxuries that are becoming mainstream amenities are: Sub-Zero freezers, stainless steel appliances, and granite countertops in the kitchen; whirlpool spas and steam showers in the bathroom; and walk-in closets, skylights, and a master bathroom in the master bedroom suite. Other upgrades include adding a home theater, bedroom, home office, or family room; installing a deck or patio; replacing windows; and building a larger garage.
Interestingly, a demographic shift is also taking place. The trailing edge of the Baby Boom generation is entering their peak earning years with record wealth, so they continue to generate demand for remodeling projects and vacation homes. It was their spending that caused remodeling expenditures to triple during the 1970s and grow by another 250 percent in the 1980s.
But a growing share of the demand for home remodeling is now coming from Generation X. This generation is rapidly joining the ranks of home owners, according to the recent Harvard report entitled, The Changing Structure of the Home Remodeling Industry.
Generation Xers, in their 30s, are spending more on remodeling their homes than the youngest Baby Boomers, now in their 40s, spent a decade ago. Similarly, the younger Boomers are outspending the older Boomers, who in turn outspent the previous generation.
For example, using average spending per household in 2003 dollars, older Boomers spent $2,000 in 2003, or $200 more than members of the War and Depression generation spent eight years earlier. In turn, the younger Boomers spent $2,300 on remodeling in 2003, $100 more than the older Boomers spent in 1995. And the GenXers spent $2,200 in 2003, or $400 more than the younger Boomers spent in 1995.
In short, each generation is outspending the previous generation on home improvement, and this trend promises to hold for the foreseeable future.
Generation X includes millions of foreign-born and minority households. Between 1991 and 2003, the share of home remodelers who were minorities jumped from 12 percent to 19 percent, according to another Harvard report entitled, The State of the Nation’s Housing 2005.
At the same time, the demographic force we mentioned earlier ? the increase in high-income homeowners ? is also fueling much of the remodeling boom.
Underlying that figure is the fact that the number of people in that income bracket is growing rapidly. Between 1995 and 2001, the number of homeowner households with incomes above $120,000 streaked upward by 73 percent, from 5.2 million to 9 million, according to yet another Harvard report entitled, Measuring the Benefits of Home Remodeling.
In the period 2000-2001, the most recent year for which figures are available, two-thirds of these upper-income homeowners invested in home improvements. Together, they spent nearly $70 billion in that year on remodeling projects. Between 1995 and 2001, they doubled their spending on renovating their homes, which produced 66 percent of the inflation-adjusted growth in spending. By contrast, households with incomes of less than $80,000 contributed only 16 percent of the growth in spending on home improvement.
Looking ahead, we offer the following four forecasts based on this trend:
First, the threats to the home remodeling industry are greatly exaggerated. It’s true that a steep decline in housing prices, a big increase in mortgage rates, or an abrupt slowdown in home sales could lower the demand for remodeling. But it’s much more likely that the remodeling sector will avoid these risks because the upper-income homeowners who are driving much of the demand are largely immune to these economic forces. As a result, according to the Harvard Joint Center for Housing Studies, the boom will continue, with an average of 3 percent per year in real growth over the next decade.
Second, the rising numbers of minority homeowners represents a largely untapped opportunity. In 58 U.S. metropolitan areas, minorities now account for at least one-third of the households. Overall, the number of white homeowners increased just 10 percent between 1995 and 2001, while homeownership rose by 45 percent among Hispanics, 40 percent among Asians, and 24 percent among blacks. Hispanics increased their spending on home improvements by 80 percent during that time, more than triple the increase in spending by white homeowners. The growth in remodeling spending among blacks, at 31 percent, and Asians, at 44 percent, also surpassed the 24 percent increase among whites. The bottom line is that remodeling contractors and mortgage lenders will need to improve their efforts to market their services to minority households by targeting African-American, Hispanic, and Asian-American homeowners.
Third, contrary to expectations, the aging of the Baby Boom will benefit, not hurt, the remodeling industry. As their children start their own households and the Boomers reach their retirement years, they will need less space instead of more. But because of their affluence and high home ownership rates, Boomers are highly likely to hire contractors rather than tackling home improvement projects themselves. Among people in the 55-to-64 age group, which will post the fastest growth of any age group in the coming decade, 80 percent of remodeling budgets are spent on professional contractors. Also, when the Boomers reach 65, those who own vacation homes or move into retirement communities will sell their current primary residences to younger buyers, who will be eager to modernize the homes built in the 1970s and ‘80s.
Fourth, the continued demand for remodeling work will have to deal with a looming shortage of labor. The worker shortage will become more acute throughout the rest of this decade, as we’ve previously reported many times. Until now, remodeling firms have compensated for a shortage of skilled workers by using semi-skilled laborers thanks to advances in construction materials, such as pre-assembled panels. But increasing border security threatens to reduce the supply of low-cost illegal immigrants. Fortunately, immigration reform, which we analyzed in the October 2005 issue of Trends, promises to make hundreds of thousands of additional legal workers of varying skill levels available with the passage of legislation resembling the Secure America and Orderly Immigration Act of 2005. The act would make new H-5A visas available to immigrants, and home-remodeling jobs would be very attractive due to the high wages paid, relative to jobs such as cleaning restaurant tables or cutting lawns.
References List : 1. USA Today, August 3, 2005, “No Place Like (Upgraded) Home,” by Maria Puente. ⓒ Copyright 2005 by USA Today, a division of Gannett Company, Inc. All rights reserved. 2. To access the report “The Changing Structure of the Home Remodeling Industry,” visit the Joint Center for Housing Studies of Harvard University website at: www.jchs.harvard.edu/publications/remodeling/remodeling2005.html 3. To access the report “The State of the Nations Housing 2005,” visit the Joint Center for Housing Studies of Harvard University website at: www.jchs.harvard.edu/publications/markets/son2005/index.html 4. To access the report “Measuring the Benefits of Home Remodeling,” visit the Joint Center for Housing Studies of Harvard University website at: www.jchs.harvard.edu/publications/remodeling/remodeling_2003.pdf
