While remodeling activity will close 2023 on a stronger note than expected, a moderate downturn is still expected for the sector in 2024 and 2025, according to Zonda.

Zonda’s Residential Remodeling Index (RRI)—a measure of overall pro-worthy remodeling and replacement levels—increased 2.4% year-over-year and 0.2% sequentially to 169.8 in the third quarter of 2023. The reading is a 19-year high for the RRI and means remodeling activity is 69.8% higher than in 2007, the baseline year of the series. The third quarter reading beat Zonda’s August forecast by three points.

When averaged on an annual basis, the RRI will increase 3.3% for 2023 before decreasing 0.5% in 2024 and 1.8% in 2025. Zonda projects annual growth will return to the sector in 2026, when activity is forecast to increase by 0.5%.

Zonda says the third quarter RRI’s strong estimates for 2023 and milder rates of pullback projected for the next two years reflect “an economy that has proved surprisingly resilient and has a more optimistic outlook.” Moody’s Analytics, the economic research company that forecasts the variables Zonda inputs into the RRI model, believes the Federal Reserve is done hiking interest rates and will achieve a soft landing for the economy with no recession. Moody’s says that while the economy will still see the effects of the rate hikes, the effects will be “modest and efficient enough” to tame inflation.

Zonda says a weaker housing market will be the main reason that the RRI will experience its first annual decreases in over a decade in both 2024 and 2025. Existing home sales are running at their lowest level since 2010 and a large portion of remodeling activity is driven by activity that occurs either before or after an existing home sells. Moody’s says the housing market is “in a deep freeze” that will “thaw out painfully slow.” The research group projects home prices will need to decline about 10% from peak to trough to restore health to the market and anticipates this decline will take years to play out. As a result of the correlation between remodeling activity and home equity, the projected decline in home values are the biggest drag on the RRI outlook.

The projected downturn in remodeling follows several years of strong growth to record levels. Remodeling activity will not vanish, though projects may be deferred to when interest rates and costs settle. The lock-in effect with mortgage rates is still driving remodeling activity for homeowners who are looking to upgrade rather than move and give up their low interest rates. However, the projects being undertaken are smaller, less expensive projects; more expensive projects are being put on the back burner until costs for materials, labor, and financing come down, according to Zonda.

On a local market level, the RRI indicates that 150 of 384 analyzed metropolitan statistical areas are expected to see growth in remodeling project volume in 2024. Among these markets, the average growth rate is projected to be 1.5%.