Why home improvement stores could have a great year

By Moneytips

While the economy has arguably recovered from the Great Recession, albeit slowly, the housing market has not yet found its footing. Occasional bursts of optimism have been tempered by poor reports in the next cycle. However, one component of housing is doing quite well -- home remodeling.

A study from the Joint Center for Housing Studies (JCHS) at Harvard University concluded that the residential construction market will not reach a full recovery for many years, but spending on remodeling could potentially reach a record level in 2015.

The biennial report covers data through 2013 and extrapolates through the succeeding years -- and so far, it appears to be on target. Fitch Ratings estimated 2014 spending to hit $307.1 billion during an October 2014 report, and estimated $325.5 billion in 2015, which would top the previous record of $324 billion set in 2007 before the housing crash.

The JCHS study attributes the increase in remodeling to several factors, including more homeowners choosing renovation over buying a new home due to the Great Recession, greater renovation of rental properties, and rebate/tax programs for energy-efficient remodeling. It's also worth noting that home improvement spending did not take anywhere near the hit that new residential construction did, with a 13 percent dip in the recession compared to 60 percent for new construction.

By drilling a little further into the numbers, the JCHS report discovered some interesting subtexts within the home improvement trends.

  • Geography - Analyzed by geography, the Northeast leads in home remodeling spending, led by the major coastal metropolitan areas (New York, Boston, Providence, Philadelphia, etc.). Other larger metro areas with high spending on remodeling ($3,500 or more) included Phoenix, the Bay Area (San Francisco and San Jose), Oklahoma City, Denver, Minneapolis, and Washington D.C.In general, metro areas spent the most on remodeling with the top 15 markets accounting for one-third of the costs. (Frankly, it shouldn't be a huge surprise that remodeling costs more in metro areas and the Northeast -- the surprise would be if it didn't).
  • Type of project - Energy-efficiency projects tended to be focused more in Midwestern and mid-sized markets, while discretionary improvements such as kitchen and bath remodels were more focused in metro areas (adding to the higher costs in Northeastern metro projects). For example, in Boston, exactly half of the improvement projects cost at least $50,000.The overall split of projects using 2013 data was as follows: exterior replacements at 20.3 percent, system upgrades at 15.7 percent, property improvements at 13.7 percent, interior replacements at 11.8 percent, kitchen remodels at 9.5 percent, disaster repairs at 8.2 percent, and bath remodels at 7.7 percent. The remaining 13.1 percent fell under miscellaneous additions and alterations.
  • Age demographics - Baby Boomers are driving the home improvement spending with a 47.8 percent share. Generation X homeowners had a 34.3 percent share, pre-Baby Boomers covered 15.3 percent of the spending, and Millennials are barely on the radar at 2.6 percent. The Great Recession prevented many Millennials from entering the housing market at all, much less renovating a home. The home renovation industry is counting on both ends of the age spectrum to drive future growth. JHCS managing director Chris Herbert notes that Millennials have already driven the rental renovation market forward, and once they begin to buy, they will have the same effect on the housing remodeling market. Meanwhile, as Baby Boomers retire and have issues with accessibility, it's expected that Boomers will engage in more remodeling to allow them to stay in their homes as they age.

While the overall housing market is in a funk, things look bright for the remodeling sector. We hope that, as the job market improves and Millennials recover from their slow economic start, the broader housing market will improve as well.

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