For the third year in a row, 2011 remodeling spending on owner-occupied homes will exceed single-family new-construction spending. Remodeling dominance is the result of a rise in demand for remodeling activities paralleling an unprecedented fall in single-family new construction.
Spending on new construction has fallen from over one-half trillion dollars annually in early 2006 to just over $100 billion in 2011. The decline is a combination of fewer numbers of units being built as well as less-per-unit spending. Single-family homes are smaller and have fewer upgrades while more modest multifamily units comprise a larger share of the new construction that is taking place.
But remodeling has also been holding its own because of the varied sources of demand and an enlarging supply of companies willing to remodel. Spending on owner-occupied remodeling has retained momentum because some owners have decided to remain in place rather than move, homeowners were provided tax credit incentives to add or replace energy-efficient items, and foreclosed homes need repair before returning them to use.
Many existing homeowners have decided to remain in place and remodel to achieve their relinquished plans to buy a different home. Existing-home sales have been running at an annual rate of 4.3 million but nearly one-third are distressed sales, so the underlying sales pace of trading homes is closer to 3 million. The underlying population numbers would suggest a rate closer to 4.5 million. The deterred sales mean owners are remaining in place because of the lack of equity, inability to qualify for a new mortgage, or concern over employment or future home prices. The alternative for some is to change their present home to achieve what they would have otherwise obtained by moving.
Homeowners enjoyed some significant energy tax incentives in 2009 and 2010 that stimulated nearly $26 billion in expenditures on such items as windows, doors, insulation, upgraded heating and air-conditioning systems, and solar panels. The tax credit for solar panels and other power production property remains in place until the end of 2016, but a weaker version of the more extensively used remodeling tax credit remains effective through 2011. Together, these tax credits continue to provide a boost to remodeling expenditures for existing homes.
Finally, foreclosed and other distressed sales are often in poor shape when ultimately acquired by the lender. Investors and homeowners-to-be purchase these homes at bargain prices and remodel them either for their own use or to resell. If the home is vacant when remodeled, the expenditure shows up differently than owner-occupied remodeling but the expenditure is still part of the overall economic activity in residential investment.
In a recent survey, the NAHB found that 15 percent of remodelers and 17 percent of single-family builders were engaged in remodeling foreclosed homes. Remodelers reported the median expenditure was $17,500 per home, which would translate into at least a $35 billion per year expenditure bringing foreclosed homes back into the market.
The steady demand for remodeling in the face of weak new-construction demand has also moved traditionally new-construction builders into the remodeling field. According to an NAHB survey, 60 percent of single-family builders are engaged in remodeling, and according to the 2010 census of members, a majority of builders list remodeling as a primary or secondary operation.
Most of the remodeling trends are likely to continue, although single-family construction will eventually come back to eclipse the total expenditures as pent-up demand emerges and employment markets provide consumers with the confidence to move forward. However, the conditions that cause some owners to remain in place and the flow of foreclosed homes will continue and provide opportunities for builders and remodelers for several years to come.