Economist Predicts Continual Improvement for Remodeling Market

May 11th, 2012 by DWM Magazine

When it comes to the housing and remodeling markets there are four key issues starting with: falling house prices, a large inventory of distressed homes and low mobility are holding back a stronger housing recovery, according to Kermit Baker, a senior research fellow at Harvard University’s Joint Center for Housing Studies, and the project director of the Remodeling Futures Program, That’s what Baker said earlier this week during a National Association of Home Builders webinar on the remodeling market.

The other three issues, according to Baker, include that with such a modest national recovery, regional patterns are beginning to emerge; the downturn has not been nearly as serious for home improvement spending (the market size is still close to $300 billion); and green remodeling and rehabbing distressed properties offers opportunities for home improvement activity.

“The most [distinctive] characteristic has been the movement in house prices,” said Baker, noting there was a big drop between 2006-2009. He also noted that house prices have just bounced along the bottom since. Distressed inventory has also been holding back prices for many homes in the country.

Another major issue is mobility. He said mobility rates have been trending down for many years, but the recent recession has pushed this to record lows. Baker reported that 2011 had the lowest rate of household mobility on record since just after World War II.

“Mobility and the health of the housing market are intertwined,” said Baker, explaining that while people might want to move they are under water in their mortgages. “Low mobility hurts home improvement because [when trying to sell a home] is the most popular time to undertake a home improvement project,” he said.

Nationally, house prices are down 3 percent over the past year. Baker pointed out, though, that some areas where prices dropped early on in the decline look as though they may have hit bottom and are starting to recover.

“Other areas have held up fairly well,” Baker said, “but until [we see] stronger growth, prices will likely be volatile.”

Looking at the national average, about 23 percent of homeowners are underwater with their mortgages. And another concern on the housing front, according to Baker, is that younger households are rethinking whether or not they want to own a home. Baker added, though, that recent surveys indicate homeownership is still favored by most households, even among young households.

Despite these challenges, the remodeling market is still doing well–about $300 billion was spent last year on home improvements.

According to Baker, remodeling improvements have contributed to growing the share of residential investments since the downturn. Though it dipped low in 2005, it has been climbing ever since, to almost 70 percent in 2009.

While the remodeling market, Baker said, includes lot of activities, the largest was home improvements. Within that segment there are also a lot of categories. Energy efficiency retrofits, for instance, are a big market. Baker said remodeling contractors report that a quarter of their revenue comes from energy-efficient requests from homeowners. He said newer homes use 30 percent less energy per square foot than homes built in the early 1970s. “Energy efficient programs need to focus on older homes to be effective,” he noted.

However, even though some conditions are improving, there are still challenges. Baker estimated that about a million homes sold last year were foreclosures and reported that total spending on distressed properties was an estimated $8.5 billion last year.

However, things do seem to be looking up. As Baker noted, the Leading Indicator of Remodeling Activity points to a healthy upturn in the second half of the year.

“It looks like we’re moving in the right direction and will see better numbers as we move into the second half of the year,” said Baker.

 

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