Nearly 80 percent of America's housing stock is atleast 20 years old and twice that share of homes were built 50 or more yearsago. With new construction still well behind its pre-recession levels Americanshave been remodeling these older homes in huge numbers.
The Joint Center on Housing Studies says there was$425 billion spent nationally on maintenance and improvement, a 10 percentincrease from 2015 and more than a 50 percent gain from the 2010 low. In fact, that spending, by both owneroccupants and landlords, has been the dominant share of residential investmentin the years since the recession and generated 2.2 percent of total economicactivity in 2017.
Spending for improvements on rental properties are alarger share of spending than the historic average of 25 percent. A surge inrenting during the Great Recession drove a boom in multifamily construction,but rising construction costs put rents on new units out of reach for many so ownersof existing rentals invested in significant upgrades to their properties to capturesome of this demand, driving the rental share of residential improvement fromabout 20 percent in 2007 to over 30 percent in 2016 and 2017.
The foreclosure crisis left many homes vacant forextended periods and there was also widespread conversion of owner-occupiedhousing to rentals. As homeownership demand started to recover, the number of vacantor rental homes moving back into owner occupancy has grown, increasing from 5.0million in 2010 and 2011 to more than 6.6 million in 2016 and 2017. With home construction lagging homebuyingdemand, these units make up a growing part of the owner-occupied stock.
Spending by owners of these newly converted homesincreased from $33 billion in 2010-2011 to $50 billion in 2016-2017, whileaverage per owner spending rose from $6,500 to $7,500. Owners spent more than double on homes thathad been vacant than where they had been rented ($10,400 versus $4,500) Spendingon homes that remained owner occupied averaged only $5,500. Spending forkitchen and bath remodels and room additions were especially high among the conversions.
Improvements to owner-occupied homes accounted for 55percent of total expenditures in 2017. TheJoint Center analyzed data from the most recent American Housing Survey (AHS) forits recent publication, Improving America'sHousing 2019. It shows that 22 millionUS homeowners completed at least one home improvement project that year. Theseranged from a relatively simple window or door replacement, to HVAC replacement,to a complete kitchen remodel or room addition.
Most projects were small; 40 percent reported spendingless than $2,500 and three-quarters spent less than $10,000. Even so, ownersspending $50,000 or more contributed one-third of the total $233 billion spentby homeowners in 2017 while those spending at least $25,000 accounted for morethan half.
Spending on replacement projects has historicallymatched spending on discretionary fixes such as additions or bath remodels withabout a 40 percent share. Since therecovery however the replacement share has grown to almost 50 percent. This increase in replacements and systemupgrades probably reflects necessary work deferred during the recession as wellas the aging of the housing stock. With lagging homebuilding, the median age ofowner-occupied homes has grown from 29 years in 1997 to 39 in 2017.
Homeowners spent $68 billion or 29 percent of themarket total on improvements increase the energy efficiency of their homes;replacing roofing and windows, adding insulation. Over 17 percent of homeownerscited energy efficiency as the motivation for their projects, up from 11percent in 2013. This was especially true in metros with older homes and harshwinters.
Spending on disaster recovery is also growing, both inabsolute terms and as a share of expenditures. Outlays for disaster-related improvementsexceeded $27 billion in 2016-2017, nearly double the two-year average of $14billion two decades earlier. This spendinggrowth has been especially strong in the South and Midwest. While insurance payouts covered most of disasterrepair costs, homeowners paid out of pocket for more than four in ten projectsin 2016-2017. Where there were insurancepayouts owners spent $20,000 on average for restoration projects in 2016-2017,but just $12,000 if they paid for the repair of disaster damages on their own.
The share of spending on do-it-yourself (DIY) projects,which includes only the material costs, fell steadily from 25 percent in 1997 tojust 18 percent in 2017. The aging ofthe US population explains at least part of this long-term decline. In 2017, 88percent of improvement money spent by homeowners age 65 and over was forprofessionally installed projects compared with 69 percent by owners under age35. The younger groups DIY share ofoutlays has also trended down, from 35 percent in 1995-2005 to 31 percent in2017.
The increase in replacements also tilt spending awayfrom DIY. Even talented DIYers are likely to hire professionals for electrical,plumbing, and roofing upgrades. Indeed, 86 percent of spending on replacementprojects in 2017 was for professional installation, significantly more than the76 percent share for discretionary projects.
Per-ownerspending on home improvements in 2017 averaged $3,000 and half of allindividual project spending was under $1,200. Households typically (77 percent)pay for these small projects out of pocket.The rest was paid for through credit or retail store charge cards (5percent), home equity loans or lines of credit and cash from mortgagerefinancing (5 percent), and insurance settlements (4 percent). Nine percent came from "other" sources suchas contractor financing or personal loans.
The share paid with cash steadily shrinks on largerprojects, from 78 percent of projects under $10,000 to 60 percent for those costing$10,000 to $49,999, 54 percent for those costing $50,000 or more. Financing ismore likely to come from home equity loans or cash out refinances as well asinsurance settlements.
Financing varies as well by type of installation.Owners paid cash for 84 percent of DIY projects compared with 72 percent ofwork done by professional contractors. Landscaping, security systems andwalkways/driveways are most likely to be paid out of pocket while roofing, siding,and additions are financed from other sources. The cost of a project tends to be higher wherefinancing is used instead of savings.
The steady increase in home prices since 2011 has beengood news for the remodeling market. Knowingthat their homes are increasing in value incentivizes owners to invest in them,and the growing equity can provide the funds to do so. This relationship is clear at themetropolitan area level. In metros withstrong home price growth in the last decade, areas like Boston, Dallas, SanAntonio, San Jose, San Francisco, and Seattle, owners have typically spentsubstantially more on home improvements than owners in metros where prices havenot yet fully recovered like Las Vegas, Miami, Phoenix, and Riverside.
However, there are limits to this relationship. Home prices have outpaced income growth forseveral years and when coupled with rising mortgage interest rates are making homeownershipincreasingly unaffordable especially to many younger households-the demographicmost critical to long-term growth of the home remodeling market.
Other factors may mitigate against the remodelingmarket as well. Mobility, the rate atwhich the population changes residences each year, has declined by almost halfover the past four decades and homeowners typically spend 25-30 percent more onremodeling projects in the first few years after relocating than do those whostay put. This slowdown is due in partto the aging of the population, the decline in household size, and advances intechnology that have made telecommuting an alternative to relocation.
Another potential problem is the depressedhomeownership rate among younger households. Homeowners under age 35 have accounted foronly 8-9 percent of home improvement spending annually since 2012, about 5percentage points less than their average share over the 1995-2011 period. An exception is areas where homeownership isrelatively affordable. There younger households do contribute significantly to homeimprovement spending.
While homeowners aged 35-54 have the highest percapita spending on home improvement, their share of market spending has declinedfrom more than 50 percent in 1995-2005 to just 41 percent in 2015 with theleading role taken by homeowners over age 55. Their numbers have grown from 26million to more than 42 million between 1997 and 2017 and their share of allhomeowners increased from 40 to almost 55 percent.
These older homeowners are living longer and arewilling and able to spend on improvements that allow them to remain safely intheir homes as they age. Their average spending increased by 57 percent duringthat period, to nearly $2,800. In aggregate these changes have increased spendingamong older owners by 150 percent to $117 billion. By comparison, total market spending was upjust 9 percent among owners under age 35 and 12 percent among owners aged 35-54over this period.
The growth in spending by those over age 65 wasespecially strong, up nearly 80 percent to $2,500 in the 20 years. Spending by those aged 55 to 65 increased 33percent while spending among those 35-54 was only 20 percent higher after 20years.
Older homeowners tend to devote a larger share of theirimprovement dollars (51 percent) to replacing home components and systems thanyounger homeowners (43 percent) and are increasingly focused on making theirhomes more accessible. More than 72percent of those over 55 reported undertaking at least one project to improve accessibilityfor the elderly or disabled. These are likely to be more expensive such asbathroom and kitchen remodels or room additions to allow single-floor living.
Older homeowners are dominating the market in partbecause of the low homeownership rate of younger households since the Great Recession.But the number of homeowners under age 35 did rise 6 percent to 7.3 millionbetween 2015 and 2017. Improvementspending among this age group grew even faster, climbing 20 percent in realterms over this period to about $22 billion and average per owner improvementspending rebounded 38 percent from $2,100 to $2,900 between the 2013 low and2017. Per owner spending among youngerowners in 2017 nearly matched the prior peak of $3,000 in 2007. In part this is because younger homeownershave higher incomes than those than the older cohort who were more impacted bythe Great Recession.
What does the report see for the future? The Joint Center says household growth aloneshould lift the number of homeowners over the next two decades. But as morelower- and middle-income households move into homeownership the recent jump inper owner improvement spending among the youngest cohort is likely to slow to amore sustainable pace. Still, the expectedgrowth in their sheer numbers should more than offset slower spending and keep expenditureson the rise. Nonetheless, the report says, the ability of younger households tomake the transition to homeownership is ultimately the key to the remodelingmarket outlook.
The growing number of older homeowners coupled witholder homes that are not configured for accessibility will continue to driveaging-in-place accommodative spending. Thiswill be especially true in slower-growing areas of the Northeast and Midwestwhere building of new homes, more likely to have accessibility features, ismore constrained.
The share of replacement projects is likely to remainhigh as the housing stock ages and the number of older homeowners grows. Sincethese are projects generally requiring professional installation, the DIY shareof spending is expected to remain relatively low.
Low energy costs of late has reduced the payback from thosetypes of upgrades. If prices remain subdued the motivation to undertake furtherenergy retrofits may also be limited.
At the same time, disaster recovery spending is likelyto climb. The Joint Center says recoveryfrom an event is usually spread over two or three years so there may already bea backlog of work from the 2016-2018 spate of hurricanes and wildfires. If the trend of stronger and more frequentevents continues, so will related expenditures increase.
Financing home improvement is a promising growthopportunity. Heavy reliance on savings limits homeowners' options. Expandingthe types and availability of new financing alternatives-especially those tiedto home equity- would likely lead to more growth in remodeling while helping topreserve and modernize the nation's housing stock.
