The collapse in the housing market has had a serious, negative impact on remodeling activity and expenditures. But the correction in the remodeling industry is expected to be far less severe than it has been for housing. And the prospects for growth in the remodeling sector look strong, although they will not come from discretionary spending on big-ticket projects, as they did in the past, but from maintaining a home's structural integrity and upgrading its efficiency.

Those are some of the predictions found in the latest report on "The Remodeling Market in Transition," published by the Remodeling Futures Project of the Joint Center for Housing Studies at Harvard University.

That report paints an ambivalent picture of a remodeling industry that, after a decade-long period of steady growth, saw expenditures dip by more than 16 percent in 2008. "With existing home sales off nearly 30 percent in the third quarter of 2008 from their recent peak, the number of new owners who might undertake improvements has also fallen sharply," the report states. The nationwide decline in sales has translated into an estimated $2 billion cutback in annual home improvement spending.

Sinking home prices that have eroded the value of existing homes, and mounting foreclosures that have tarnished entire neighborhoods, have made the psychological imperative to remodel less compelling. The report points to a study conducted by REMODELING (a sister publication of BUILDER) and the National Association of Realtors, which found that the owner's share of cost recovered from remodeling projects at resale fell last year by nearly 20 percentage points from the 2005 peak to 67.8%.

Still, the Joint Center insists that the fundamentals supporting the remodeling industry remain solid: a housing stock of nearly 130 million homes "in ongoing need of maintenance, component replacement, and adjustments to meet changing preferences and lifestyles." However, economic volatility is likely to reduce the size and scope of projects that homeowners are willing to undertake in the future. The report notes, for example, that half of design/build firms reported a decline in average job size in 2007, as did nearly the same portion of full-service remodeling firms. For further evidence of remodeler desperation, the report points to a poll that the online contractor service Angie's List conducted in late 2008, which found that more than three quarters of contractors would consider cutting their prices to get a project.

The report concludes that maintenance and repair will drive remodeling expenditures over the next few years at least. And it recommends three growth segments that remodelers should pursue:

•Foreign-born households: In 2007, these households spent about $23 billion on improvements, and their spending increased by almost 13 percent per year since 2007, nearly double the growth rate among domestic-born homeowners. As this foreign-born segment of the population continues to rise—the Census Bureau estimates that its share of growth will expand to 44% by 2010 and to nearly 50% by 2025—its propensity for engaging in home improvement projects should bode well for remodelers that go after these owners' business.

•The rental market: The median age of America's rental stock is 36 years, versus 32 for owner-occupied homes. During the housing boom in the late 1990s through mid 2000s, investment in rental property sagged, so there's "a dire need for improvements," the report states. In addition, it is highly likely that some of the excess supply of unsold owner-occupied units will be converted, at least temporarily, to rentals, and these will need to be fixed up to be marketable.

•Green renovation: Existing homes consume 22% of the nation's energy. Homes built before 1970 are responsible for about 40% of residential energy use. That stock of older homes, then, "provides a prime market for energy efficient upgrades," the report says, especially if Washington, as promised by the Obama administration, provides financing for such improvements. Consequently, remodelers with a green reputation will have a competitive advantage "in that these contractors can assure customers that they will use appropriate products and installation procedures to ensure favorable results."

John Caulfield is senior editor at BUILDER magazine.

Learn more about markets featured in this article: Boston, MA.