Zonda’s Residential Remodeling Index (RRI) projects the fourth quarter of 2022 to be the peak of remodeling activity. Remodeling activity is forecast to decline beginning in the first quarter of 2023 and post quarterly declines through mid- to late-2025, according to Zonda.
The fourth quarter RRI posted a reading of 167.2 in the fourth quarter of 2022, a 6.4% year-over-year increase from the prior-year period. The quarterly reading matched the third quarter’s revised number and indicates remodeling activity ended the calendar year 67.2% higher than the baseline year of 2007.
The quarter-to-quarter decreases forecast to begin in the first quarter of 2023 will translate to year-over-year declines in the RRI beginning in the second quarter of 2023. When averaged annually, the RRI is expected to decrease 1.3% in 2023, 2.9% in 2024, and 0.6% in 2025. As a result of the massive growth in remodeling spending during the pandemic, while year-over-year comparisons will be negative, remodeling activity will still remain nearly 60% higher than the 2007 baseline over the next three years, according to Zonda. Zonda’s forecast of moderate decreases is primarily due to an expected correction in home prices and the near-term possibility of an economic slowdown.
While mortgage rates have steadied from November 2022 peak levels, Zonda says the correction in existing home prices has a long way to go to help restore affordability and improve housing demand. Moody’s Analytics, an economic research company that forecasts variable used in the RRI model, suggests if the average 30-year fixed mortgage rates fall to 5.5% and personal incomes continue to rise, only a 10% decline in home prices from peak to trough will be needed to restore affordability. However, Moody’s forecasts the 10% correction will not be achieved until late 2024 or early 2025.
The slowdown in existing home sales will only result in a small adjustment in remodeling activity and will be offset by many homeowners choosing to stay put and improve their current homes, according to Zonda. Decreasing home values—and their impact on tappable equity and homeowner confidence—will likely have a more negative impact on overall remodeling activity.
While the correction in housing and possibility of a sluggish economy due to a recession will likely impact remodeling activity, Zonda says several mitigating factors will help drive the home improvement industry. Many new homeowners—who purchased during the frenzied period in 2020 and 2021—have homes that do not align with their wants or needs and likely will turn to remodeling and renovation activity. Remodeling spend is also projected to be positively impacted by the large number of homes built in the early 2000s that need upgrades or are due for replacement projects, according to Zonda.
In 2022, Zonda estimates 17.8 million pro-worthy remodeling projects were completed. For 2023, Zonda projects the number of pro-worthy projects completed will fall to 17.5 million, followed by decreases to 17.1 million in 2024 and 17.0 million in 2025.
As part of the RRI estimation, Zonda projects 163 metropolitan statistical areas will see growth in annual project volume in 2023. Among these markets, the average growth rate is expected to be 1.4%.