Remodeling Is A Growing Market

November 18, 2005
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Kermit Baker, senior research fellow, Joint Center for Housing Studies, Harvard University.
WASHINGTON - Remodeling market trends was the topic of a presentation by Kermit Baker, senior research fellow, Joint Center for Housing Studies, Harvard University, at the National Association of Home Builders (NAHB) Construction Forecast Conference. He noted that remodeling has been showing solid growth, although not quite as vigorous as new construction.

"The remodeling market has almost doubled in size over the past decade," said Baker. About 75 percent of the market is spending by homeowners, while 25 percent is by rental unit owners.

After a jump of about 20 percent in the fourth quarter of last year, homeowner remodeling activity is leveling off at about 5 percent this year.

"Despite the strong growth in remodeling, it has not kept pace with new construction," Baker said. Remodeling has averaged 6 percent annual growth; new construction has averaged 10.2 percent.

As of 2003, homeowner improvement spending stood at $138.1 billion, with $15.4 billion spent on replacements of systems and equipment, which includes plumbing and HVAC.

"The industry has become more dependent on upper-end projects," stated Baker. Large projects have been capturing a growing market share.

"Almost 30 million homes were significantly upgraded over the past decade," he said. Among owner-occupied homes, 39.1 percent made significant improvements as a percentage of home value and 6.7 percent made major improvements. He noted that 44.1 percent made modest improvements, while only 10.1 percent made no improvements.

Many of the fastest growing metro markets for remodeling are located in the Sunbelt. These include Los Angeles, Dallas, and Orlando, Fla. Regarding demographics, baby boomers still dominate the remodeling market. The share of total home improvement spending by baby boomers has been in the low 50 percent range throughout the last decade.

Builder concentration took hold in the 1990s, but the remodeling contracting industry remains fragmented. "There is little evidence of consolidation," said Baker. "However, the largest 3 percent of firms account for almost a third of billings." Although fragmented, remodeling contractors typically focus their business. Of the top 100 companies, 47 consider themselves specialty contractors.

One concern about the remodeling outlook is that rising financing costs could limit remodeling spending. However, the Joint Center for Housing Studies has found that less than one-third of all home remodeling spending is financed.

Another concern is that, with rising house prices, recent home buyers could be priced out of the home improvement market.

However, high-end income growth has kept pace with rapid home price inflation and "this group has been driving the market recently," Baker remarked. Interior upgrades have been concentrated in high-value homes.

A third concern is that aging baby boomers could limit future remodeling demand. But the Joint Center has found that each generation is outspending its predecessor on home improvement.

Overall, in looking at the remodeling market, Baker said, "We're not seeing too many dark clouds."

Publication date: 11/21/2005

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