Zonda’s Residential Remodeling Index (RRI) posted a record-high reading of 154.1 in the first quarter of 2022, an 8.4% increase from the first quarter of 2021 and a gain of 1.2% from the previous quarter. The RRI grew 12.7% in 2021, the strongest annual increase in the index’s history dating back to 2004. Zonda forecasts the RRI will end 2022 with a 5.5% gain, before settling into more “historically moderate” growth rates of 2% in both 2023 and 2024.

The latest RRI reading indicates big-ticket remodeling activity in the U.S. is currently 54% higher than the baseline year of 2007, the peak of remodeling activity during the 2000’s. The growth during the first quarter of 2022 marks the 40th consecutive quarters of growth since remodeling activity bottomed in 2011.

Zonda says remodeling activity continues to be driven by high appreciation in home values and home buyer demand that remains steady. As a result of median existing home prices appreciating 9.1% in 2020 and 17.0% in 2021, homeowners now have “extraordinary levels of home equity,” according to Zonda. Home equity will also likely increase, as the National Association of Realtors (NAR) expects the median price to increase another 8.4% in 2022 due to low housing supply.

Zonda forecasts the recent increase in mortgage rates will cool down existing home sales, as some would-be buyers—primarily interest rate-sensitive entry-level buyers—get priced out on a monthly payment basis. The NAR projects existing home sales to contract 9% in 2022 after reaching a 15-year high in 2021. A subsequent decrease in 2023 is also projected by the NAR. The decreases in existing home sales will take some remodeling potential off the table due to a smaller amount of housing turnover occurring. Sales volumes, though, are still projected to be stronger than in the strong 2019 market.

According to Zonda, high and broad-based inflation, and its implications for increasing interest rates and slower economic growth, has the RRI model predicting more temperate rates of growth ahead for home improvement activity.

Outside of economic and housing variables that are used in the RRI model, several outside factors, including supply chain disruptions, material costs, and cost and availability of skilled trade workers, could work against remodeling contractors and their project potential. Conversely, as mortgage rates rise through 2023, Zonda says more homeowners will be convinced to stay in their current homes, and potentially improve current homes where they have locked in low rates.

The RRI estimates the number of pro-worthy remodeling projects worth $1,000 or more completed in 2021 was 15.9 million. Zonda forecasts the number will increase to 16.8 million in 2022 and to 17.1 million in 2023.

As part of the RRI estimation, Zonda predicts that 279 of 381 observed metropolitan statistical areas are expected to see growth in annual project volume. Among the markets expected to see growth, the average growth rate is predicted to be 6.4%.

The RRI is based on a statistical model that takes into account data such as household level remodeling permits and consumer-reported remodeling and replacement projects. It uses a model to predict the number and dollar volume of home improvement and replacement projects nationwide worth at least $1,000 in 381 metropolitan statistical areas and nationwide.