According to A New Decade of Growth for Remodeling, the sixth and latest report in the Improving America’s Housing series from the Joint Center for Housing Studies of HarvardUniversity, over the coming years remodeling expenditures are expected to increase at an inflation-adjusted 3.5% average annual rate, below the pace during the housing boom, but sharply recovering from the recent downturn.
“As both the economy and the housing market stabilize, so too will homeowner improvement spending,” said Abbe Will, a researcher with the Remodeling Futures Program, in a press release.
Just under a third of the spending increase comes from the expected growth in number of homeowners by 4.5 million over the coming years. The remaining two-thirds reflects an increase in per-household spending.
 As with past housing cycles, employment growth is key both to the sustainability and strength of the turnaround market, said managing director of the Joint Center, Eric Belsky, in a press release. He discusses the findings in this video.

Patterns and Top Markets
During housing market downturns, the home improvement share of residential investment rises. When housing markets crashed between 2005 and 2009, the remodeling share climbed to more than two-thirds of total residential investment.

Though the recent remodeling downturn was the most severe in the last 25 years, with a 12.5% decline in remodeling spending from 2007 to 2009, the industry is beginning to return to a more typical pattern of growth. Market fundamentals — the number of homes in the housing stock, the age of those homes, and the income gains of homeowners making improvements — all point to increases in remodeling spending. “Metropolitan areas with rising house prices, older housing stocks, higher incomes and home values, and a larger share of upscale remodeling expenditures, such as Boston, San Francisco, and Los Angeles, are well-positioned for an upturn in remodeling activity,” Belsky said, in a press release.
Homeowner improvement spending is concentrated among a relatively small number of metropolitan areas. Income and house prices are key determinants of improvement expendi¬tures per homeowner, and high-income households and high-priced homes are typically located in large metro areas. Over the past decade, the top 10 metro markets were home to just 22% of homeowners but accounted for 31% of total homeowner improvement spending (defined here as net of routine maintenance expenditures). The top 35 metros were home to 43% of homeowners but accounted for nearly 55% of spending.

Replacement Projects
The composition of homeowner expenditures also changed over this period. The share of spending on discretionary proj¬ects — kitchen and bath remodels, room additions and altera¬tions, and other interior additions — declined from 49% to 46%, while the share of spending on exterior replacement projects and sys¬tem upgrades increased by almost exactly the same amount.
During the boom years, revenue growth among design/build and full-service firms outpaced that for exterior replacement contractors. But as homeowners cut back on higher-end dis¬cretionary projects such as major kitchen and bath remodels and room additions, revenue declines for design/build and full-service firms were especially sharp. The median drop in receipts for design/build companies was more than 20% in 2009, while that for exterior replacement firms was less than 5%.

In addition to more stable demand, contractors specializing in exterior replacements benefited from provision of federal tax credits for projects designed to improve home energy efficiency.

Growth Opportunities
Remodeling contractors have a number of growth opportunities generated by underinvestment in distressed properties, lower mobility, changing migration patterns, and the rise of environmental awareness.
“Lower household mobility following the housing market crash means that in the coming years, homeowners will increasingly focus on improvements with longer paybacks, particularly energy-efficient retrofits,” said Kermit Baker, director of the Remodeling Futures Program at the Joint Center, in a press release. “Also, a slowing of migration to traditionally fast-growing Sunbelt metro areas means that, at least temporarily, more remodeling spending will remain in older, slower-growing areas in the Rustbelt and in California.”

Factors affecting industry growth:
*Lower household mobility is a product of the housing downturn. Many owners who would normally have moved in recent years have stayed in their homes either because they were holding out for higher selling prices or because they were underwater on their mortgages and unable to cover the difference between the outstanding loan balance and the sales price. At the same time, many potential buyers have had difficulty getting mortgages under today’s stricter under¬writing standards or have delayed purchases out of concern that home prices might decline further.
*House price appreciation will be a major factor in determining the rebound in remodeling activity. Changes in home prices and improvement spending have displayed similar trends throughout the past decade, rising together from 2001 to 2006 and bottoming out in 2009.
* With growing concern over environmental sustainability and home energy costs expected to rise in the years ahead, spending on green remodeling projects in general — and energy-efficient retrofits in particular — should see healthy gains.
*Between 2003 and 2007, immigrants more than doubled their remodeling expenditures, increasing their share of the overall market from about 8% to more than 10%. But with the national economic recession, net immigra¬tion slowed and per-household spending on improvements fell more among foreign-born than native-born homeowners. However, foreign-born homeowners will remain a vital market for the remodeling industry. Immi¬gration is expected to recover, ensuring that foreign-born households account for a large share of net new households. As these households age into their peak remodeling years (mid-30s to mid-50s), they will support further growth in improvement spending.
*One of the major contributors to the remodeling indus¬try slump is the rising number of distressed properties. Owners who are delinquent on their mortgage payments or who are going through the foreclosure process are unlikely to make improvements to their homes. Even if they have the resourc¬es to do so, these owners have little incentive to upgrade since they will not recoup any benefit from the investment.

A New Decade of Growth for Remodeling is the sixth and latest report in the Improving America’s Housing series, published by the Remodeling Futures Program at the Joint Center for Housing, Harvard University. The Joint Center for Housing also publishes an annual report called the State of the Nation's Housing.