In its annual “State of the Nation's Housing” report, the Joint Center for Housing Studies of Harvard University (JCHS) affirmed that, while there are more reasons to be concerned than in the past, the outlook for the near future is still relatively bright.
Cashing In On Cash-Out The entire report is available on the JCHS Web site ( www.jchs.harvard.edu), but parts of it are more relevant than others in regard to the remodeling industry — and some of it is a bit surprising. As was widely reported, cash-out refinancing was a major driver of the remodeling boom of 2003 and 2004, but as interest rates climbed from all-time lows, conventional wisdom would say that cash-out activity would slow down.
However, the JCHS report, citing data from the National Association of Realtors, said that U.S. homeowners cashed out roughly $450 billion of home equity in 2005, up more than 12% from 2004's record total (see chart, below). Kermit Baker, director of the Remodeling Futures program at the JCHS, offers an explanation: “We're in a unique situation where the difference between short- and long-term mortgage rates is very small.” He says that as short-term interest rates increase, more and more homeowners are switching from adjustable rate mortgages to long-term fixed rate mortgages (trading a bit of extra cost for more stability). While remodeling may not be part of their original plan, Baker says that the refinancing process is a “convenient” time to take additional money out of the house, which is then often used for home improvements.
The New American Homeowner The report states that demand for high-end housing continues to drive the market, and it also reinforces demographic trends that have been predicted for years; namely, the increase in minority homeownership, as well as the aging of the general population. Baker predicts that the latter will spur remodeling activity relating to retrofitting homes to make them more convenient for the elderly. “That certainly looks to be a big market on the horizon,” he says.
A second market that could be the next “big” thing relates to rising energy costs. Data from the 2001 Residential Energy Consumption Survey, reported by the JCHS, shows that the average annual energy cost per 1,000 square feet for a home built between 1990 and 2001 was $583, compared to $627 for homes built in the 1980s. The average cost for all houses was $675.
Baker says he thinks that this trend will eventually lead to an increasing demand for home improvements that enhance energy efficiency, not only because of immediate cost-saving considerations, but also due to resale value. “There's a pretty significant disparity [in energy costs] between older and newer homes,” Baker says, “and with the newer models so far ahead in the game, potential buyers will be turned off [by the larger energy costs of older homes].” Citing a recently released JCHS paper on energy costs and remodeling (look for a story about it in this space later this year), Baker added that if history rings true, it will be some time before we see it in the marketplace.
Another future driver of remodeling activity may be the fact that today's younger households are wealthier than their predecessors. More traditional wealth and higher incomes mean more money to spend on remodeling, and, Baker says, “with high home equity, there is an incentive to protect it through home improvement projects.”
One of the overarching themes from the report is the housing affordability crisis facing the country. It's one of the few negative indicators that the JCHS predicts will get worse as time goes on. Specifically, the report refers to “restrictions on residential development and the growth in low-wage and part-time employment” as the main reasons that a record 46% of the bottom income quartile paid more than half their household incomes for housing in 2004. Unfortunately, neither of these factors seems likely to improve in the near future, and indeed, will probably become even more of an issue.
The implications of this trend, should it continue, are clear. “Homeowners spend more money on home improvements than renters do,” Baker says. An increased problem with housing affordability could not only cause homeownership rates to level off or decline, but would also constrain the disposable income of those who do own houses. “It becomes harder and harder to justify a home improvement expenditure,” Baker says.