Professional Remodeler

Harvard Study Predicts Steady Growth for Remodeling

By Jonathan Sweet, Senior Editor -- 2/26/2007 12:59:00 PM

The remodeling market has grown incredibly in the last decade, with total volume nearly doubling from $149 billion in 1995 to $280 billion in 2005, according to the latest report from the Joint Center for Housing Studies of Harvard University. Professional Remodeler talked to Kermit Baker, the center’s senior research fellow, about the report and its findings.

PR: We saw large increases in remodeling volume over the last five years. What were the major factors behind that?

Baker: It was the same sort of things we were seeing propelling growth in the home building market: record-low mortgage rates and high rates of increase in home values. Many people took that opportunity to tap into their growing equity to do home improvement projects. Homeowners were confident that any improvements they made would appreciate like the rest of their home. It was really an instance of all the stars aligning.

PR: Why did we see the slowdown in 2006?

Baker: It’s largely the reverse of the factors I just mentioned. Mortgage rates are back to more traditional levels, and we’ve certainly seen a damper on house price appreciation, with prices falling in certain markets. It seems people are sitting tight for the time being and waiting for the market to seek its own level.

There’s always been this notion that remodeling is a counter-cyclical activity, that remodeling increases as home building decreases. The truth is there’s not much evidence to bear that out. High-end projects are about as cyclical as home building. The other big piece of the market is replacement projects, and those tend to be tied to maintaining the integrity of a home. So you end up getting something that’s not nearly as volatile as home building, but is cyclical.

PR: In the report, you predict steady growth over the next decade. What are the elements driving that growth?

Baker: Despite the investments over the last five years, we see several areas that show potential for growth.
The whole rental improvement market is poised for investment. Most rental units have been underinvested for the last several years, and there’s a pretty dramatic need for improvements.

Another opportunity is energy-efficient retrofits. Most homeowners have been hit by rising energy prices, and even if they don’t continue to go up, they’re not going to go back down to where they were a few years ago. Projects that increase energy efficiency will become increasingly important.

The third factor is that our homes are getting older. Those homes built during the booms of the 1970s and 1980s are reaching the age where systems start to fail and things need to be done. According to our research, about 45 percent of owner-occupied homes would appear to have been undermaintained, having spent less than $1,000 a year on maintenance over the last five years. That’s less than you would probably need to even maintain those homes in their current condition.

PR: By 2005, 5 percent of households were accounting for 60 percent of the remodeling in the country, according to the report. What does that mean for the industry?

Baker: Well, it’s not a good thing to build an industry around. In 1995, the top 5 percent accounted for 45 percent of the market, so there’s always tended to be a significant concentration in a small group. However, it’s not healthy to rely on a small portion of the population over the long term, to the extent that we’ve seen over the last few years. We actually saw a decrease in the percentage of homes undertaking improvements from 2000 to 2005.

When we looked at the market we were surprised how unbalanced it was. We expected to see growth coming from more projects being undertaken by more households, not the phenomenon of fewer households doing more expensive projects.

We’re probably going to see the market go back toward the 1995 number. The 1995 to 2000 period was probably a more normal time for remodeling than the last five years. We’ll continue to see the concentration, just not as extreme.

PR: One of the things you talk about in the report is consolidation in the residential construction industry from suppliers to builders, but we’re not seeing that in the remodeling industry. Why?

Baker: That’s the $64,000 question. It’s been very difficult for remodelers to take success in one market and replicate it in another. Remodeling tends to be very local.

We’ve seen some growth in the size of firms, but a lot of that has been because we’ve had 10 to 12 years of uninterrupted growth in the market. What we are seeing is greater specialization in remodeling companies. The general full-service remodeler seems to be going by the board. Specialization is allowing remodelers to see some of the economies of scale that firms would get through consolidation, such as greater buying power and the ability to develop more systems.

PR: Generation X is taking an increasingly important role in remodeling. What can we expect from it in the coming years?

Baker: For years, the industry has been about the baby boomers. But Generation X has spent more in their 20s and 30s than the baby boomers did. The best we can tell is that the mid-30s to mid-40s is the peak age for remodeling spending, so their importance is only going to increase. By 2015, we expect that they’ll be the age group that accounts for the largest amount of spending.

What’s surprising is that the numbers of households are not as small as we expected them to be. A lot of immigrants coming into the country are fitting into Generation X and buying and investing in homes. The per household spending is about what we expected, but the numbers of households has grown a lot faster than we expected.

To view the full report, visit www.jchs.harvard.edu.

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