While total home improvement activity has grown over the past two years, there have been numerous ups and downs driven by policy changes and broader housing market conditions.
Like other elements of the housing industry, home improvement spending declined with the onset of the housing crisis. From March 2007 to July 2011, Census data indicate remodeling activity fell by approximately 38 percent. While painful for professional remodelers, this drop was relatively small compared to the peak declines for single-family (81 percent) and multi-family (76 percent) construction spending.
Despite the recession-inflicted decline in business, the growth outlook in the remodeling industry remains positive in the long run given the aging housing stock and homeowners' preference to improve the performance of their homes. According to data from the 2009 American Housing Survey, the median age of an owner-occupied home was 34 years old, up 11 years in age from the 1985 AHS. According to the same data, more than 40 percent of the owner-occupied housing stock is at least 40 years old.
With a rising desire for better-performing homes in terms of water and power use, increased demand for home improvement services will follow. The Leading Indicator of Remodeling Activity, published by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, suggests double-digit percentage gains for remodeling activity for the first half of next year. The NAHB Remodeling Market Index reached a level of 50 during the third quarter, the highest reading in five years.
Another factor supporting more remodeling activity is home sales. In general, home improvement spending tends to be correlated with the volume of existing-home sales, because a significant amount of remodeling occurs prior to a home sale and immediately after a home purchase. Estimates by the National Association of Home Builders find that the typical buyer of an existing single-family home spends more than $4,600 on repairs and alterations and more than $1,900 on appliances. Thus, as existing home sales fell during the Great Recession, remodeling activity declined as well.
But the decrease in moving during the crisis also produced a demand for remodeling that partially offset some of this decline. With less mobility thanks to job loss and dropping real estate values, people were remaining in their homes for a longer period of time and opting to remodel instead of moving to a new home. NAHB survey data indicate that among the reasons for increased remodeling demand in 2011 included typical reasons such as need for repairs or newer amenities. But almost half of remodelers surveyed also reported an increase in business among clients who wanted to avoid relocating to another home.
Additionally, tax credits for energy-efficient improvements helped support demand for remodeling during the housing market downturn, including a 30 percent tax credit for installation of power production property, such as solar panels and a tax credit for energy-efficient upgrades such as windows and hot water tanks.
The tax credit for energy efficient upgrades in existing homes was particularly helpful in stimulating remodeling activity during 2009 and 2010 when the maximum credit amount topped out at $1,500. According to the IRS and NAHB estimates, in 2009 alone, $5.9 billion in tax credits were claimed in connection with at least $25 billion in energy efficient remodeling.
The outlook for the remodeling sector in 2013 remains positive. Like the potential for significant increases in other areas of housing, expansion in the remodeling industry means job growth. On average, every $10 million in remodeling expenditures creates enough economic activity to support 111 jobs.
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Robert Dietz is an economist with the National Association of Home Builders (NAHB). Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's economics blog Eye on Housing. Follow Robert on Twitter at @dietz_econ. The information presented here does not necessarily represent the views of NAHB or its membership.
Clarified 1/4/2013: This article has been updated to include an explanation of tax credits for energy efficient upgrades.