Housing industry metrics usually refer to the number of starts as the key indicator of the industry’s health, or level of illness most recently. However, a unit count leaves out the increasingly important component of remodeling within total residential construction. In fact, depending upon how it is measured, remodeling has taken over first place in total expenditures within the broader category of construction spending.
The Census Bureau’s residential construction spending counts only improvements to owner-occupied homes, and that component rose to 48 percent of all residential construction spending in January 2010. Improvements to owner-occupied homes have exceeded single-family construction value since February 2009. Prior to the mid-2000s, improvements to owner-occupied homes constituted about one-quarter of all new-residential construction spending and fell to 21 percent during the mid-decade construction boom.
The broader measure of residential construction spending within the Gross Domestic Product (GDP) accounts includes all forms of residential remodeling including remodeling of rental, vacant, and second homes. According to that accounting, improvement expenditures were 42 percent of all housing construction in 2008 and are expected to be over 50 percent of residential construction in 2009. Before the mid-2000s, the share of all improvement spending remained near 30 percent and dipped to 25 percent in 2005.
The new-found fame for remodeling comes as a result of unique times and some additional government encouragement. First, spending is down in every category of residential construction. Owner-occupied improvement spending in 2009 was at roughly the same level last seen in 2004, even adjusting for inflation. Total residential improvements from the GDP accounts are back to the levels seen in 2002. But, the other new-construction components have fallen back even further so that in relative terms, remodeling improvements fell less and have taken first place.
The stock of existing homes eligible for remodeling continues to grow. Professional remodeling activities are concentrated in the 85 million homes that are 25 years old and older where about one-fifth of owner-occupied homes spent an average $11,400 on a professional remodeling job in 2007.
Builders are aware of these shifts, and many have changed their focus. In a December 2009 builder survey, two-thirds of the builders said they had or were planning to diversify and two-thirds of them said remodeling was the alternative. In the 2009 NAHB census of members, the only major category of builder member that increased was remodeler, which rose 6 percent compared to a 20 percent drop in builder members.
Remodeling and remodelers have not experienced the dramatic ups or downs experienced in new construction. In 2009, remodeling spending was down 20 percent from the peak in 2005 while new-construction value was down 72 percent over the same period. The NAHB measures the sentiment of remodelers in a Remodelers Market Index (RMI) that is calibrated from 0 to 100 with 50 being the Goldilocks moment of a just right market. The RMI rose to a high of 57 but is running in the 30s most recently, a span of 20 points.
Finally, federal energy tax credits have added to the uptick in remodeling expenditures. Homeowners can get up to a $1,500 tax credit for replacements with certain energy conservation items in 2009 and 2010 and up to 30 percent of the cost of alternative energy installations through 2016. The energy conservation credit affects about $33 billion in remodeling expenses. The incentives had a part in past increases in remodeling and will increase the spending in those categories by $6 billion or more in 2010.
Even without the tax incentives, the aging stock of homes and the aging Baby Boomers who are likely to remain in their homes provide an excellent source of new business for those who have found renewed interest in remodeling.