Though falling home prices have discouraged discretionary home improvement spending and diminished the amount of equity that owners have in their homes, the Joint Center for Housing Studies of Harvard University (JCHS) reports a bright outlook for the remodeling industry in its latest report, "The Remodeling Market in Transition, 2009."

The report, released by the Joint Center’s Remodeling Futures Program, says that in this uncertain economic environment, homeowners are likely to focus their remodeling spending on projects that improve energy efficiency, generate cost savings, and maintain structural integrity. It also anticipates that a correction in the remodeling market will be less severe than in that of the home building industry.

Demand for Rental Housing Rises: Number of renter households (millions); renter share of all households (%) During the decade when homeownership rates soared, the number of renter households fell from almost 36 million in 1994 to less than 33 million in 2004. With the for-sale market now in collapse and challenges in lending, the trend is reversing. Stronger demand for rental units creates an opportunity for remodelers to rehab the aging rental stock with energy upgrades and finer finishes. Nearly half of rental units were built before the 1970s, and only 15% have been built since 1990.
Demand for Rental Housing Rises: Number of renter households (millions); renter share of all households (%) During the decade when homeownership rates soared, the number of renter households fell from almost 36 million in 1994 to less than 33 million in 2004. With the for-sale market now in collapse and challenges in lending, the trend is reversing. Stronger demand for rental units creates an opportunity for remodelers to rehab the aging rental stock with energy upgrades and finer finishes. Nearly half of rental units were built before the 1970s, and only 15% have been built since 1990.

Foreclosure and Renting Become Opportunities

As a reminder that situations often must get worse before they get better, Nicolas P. Retsinas, director of the JCHS, includes in the report a realistic look at the current economic situation. “Earlier this decade, the ability to borrow against equity created by rising home prices fueled remodeling activity, as well as broader consumer spending,” Retsinas says. “Now that prices have softened, owners cannot finance home improvement projects as easily. Even those with equity find credit harder to obtain due to tighter standards.”

Foreclosure risks also have driven down remodeling activity up to now. Owners at risk of defaulting on their mortgages have less incentive to invest in their homes, and those displaced by foreclosure will reduce the national homeownership rate and, in turn, lower remodeling demand.

Interest in Green Products Goes Beyond Efficiency: The Harvard JCHS asked a panel of full-service remodelers about how frequently they installed green products that met at least one of the four criteria above. The survey focused on 10 products listed by the Partnership for Advancing Technology in Housing (PATH) as having the 'most promise for making our existing homes more durable, stronger and more resource efficient.' Respondents indicated that they were no more likely to install energy-efficient products on average than products promoting the other three goals.
Interest in Green Products Goes Beyond Efficiency: The Harvard JCHS asked a panel of full-service remodelers about how frequently they installed green products that met at least one of the four criteria above. The survey focused on 10 products listed by the Partnership for Advancing Technology in Housing (PATH) as having the 'most promise for making our existing homes more durable, stronger and more resource efficient.' Respondents indicated that they were no more likely to install energy-efficient products on average than products promoting the other three goals.

When housing markets recover, however, foreclosed properties will provide opportunities for home improvements, as banks and new owners renovate and repair these properties and state and local governments make use of the Housing and Economic Recovery Act of 2008, which allocated $4 billion for the redevelopment of abandoned and foreclosed properties.

Spending Increases Among Immigrant Homeowners: Improvement spending by foreign-born homeowners (Billions) In 2007, foreign-born homeowners spent about $23 billion on home improvements. Their spending levels have grown almost 13% per year since 2000 ' well in excess of the 7% among the domestic-born population. As a result, immigrant owners now account for more than 10% of home improvement expenditures, up from 8.5% earlier in the decade. JCHS Research also shows that immigrants contribute significantly more to improvement spending in "gateway" citis, such as Boston, Dallas, Houston, Los Angeles, Miami, New York, San Diego, San Francisco, Seattle, and Washington.
Spending Increases Among Immigrant Homeowners: Improvement spending by foreign-born homeowners (Billions) In 2007, foreign-born homeowners spent about $23 billion on home improvements. Their spending levels have grown almost 13% per year since 2000 ' well in excess of the 7% among the domestic-born population. As a result, immigrant owners now account for more than 10% of home improvement expenditures, up from 8.5% earlier in the decade. JCHS Research also shows that immigrants contribute significantly more to improvement spending in "gateway" citis, such as Boston, Dallas, Houston, Los Angeles, Miami, New York, San Diego, San Francisco, Seattle, and Washington.

Similarly, at a presentation during the International Builder’s Show, JCHS senior scholar William Apgar also noted opportunities for the remodeling market in rental properties. “With homeownership declining, rental rates are rising,” he explained. “This has been an overlooked market in remodeling for some time. There are many under maintained buildings in the marketplace, and with the number of renters up by 3 million, there’s an opening for remodelers to upgrade these buildings, especially in areas of energy efficiency.”

Remodeling Improves Efficiency of Existing Homes: Energy consumption per square foot (Thousand Btus) In 1980, occupants of a typical 1960s home used 65 Btus of energy per square foot. By 2005, their usage was 25% lower. Homes built in the 1950s or earlier show even greater efficiency improvements over time. Some of these savings result from removing older, wasteful homes from stock, and from households changing to energy-conserving behaviors. The bulk of the efficiency gains likely arise from retrofitting older homes and their systems.
Remodeling Improves Efficiency of Existing Homes: Energy consumption per square foot (Thousand Btus) In 1980, occupants of a typical 1960s home used 65 Btus of energy per square foot. By 2005, their usage was 25% lower. Homes built in the 1950s or earlier show even greater efficiency improvements over time. Some of these savings result from removing older, wasteful homes from stock, and from households changing to energy-conserving behaviors. The bulk of the efficiency gains likely arise from retrofitting older homes and their systems.

Energy and Upgrades

Indeed, the consumer shift toward energy-efficient products and systems will remain strong and will pave the way for green remodeling, according to the report. “If we are going to meet the nation’s energy goals, we have to continuously search for ways to improve the residential built environment,” says Mohsen Mostafavi, dean of the Harvard Graduate School of Design, where attention to green design is a growing focus in the classroom and studios. “The report demonstrates that maximizing energy efficiency in existing housing may be one of our greatest challenges but also one of our greatest opportunities, given that homes account for almost a quarter of energy consumption in our economy. Consumer demand for sustainable design is on the rise. Architects and planners can lead the way in devising appropriate solutions.”

Existing rental housing and the growing number of immigrant homeowners will also help reverse this downturn in the remodeling industry. “Years of underinvestment have left the nation’s rental stock, at an average age of 36 years, in desperate need of improvement and repair,” says Kermit Baker, director of the Remodeling Futures Program. “And foreign-born homeowners, who currently account for more than 10% of home improvement spending, are heavily concentrated in their 30s and 40s, ages when families are growing and changing the use of their home.”

Taken together, these trends, plus a solid foundation of 130 million homes in continuous need of maintenance, upgrade, and repair, show a bright future for the remodeling industry.