Zonda’s Residential Remodeling Index (RRI) posted an all-time high reading of 146.5 in the second quarter of 2021, marking a historically strong gain of 12.1% from the second quarter of 2020. According to the RRI, big-ticket residential remodeling spending in the second quarter increased 1.8% from the first quarter of 2021.
The reading of 146.5 indicates economic conditions known to impact remodeling are 46.5% higher than the old peak in 2007. The second quarter reading marks the 37th consecutive quarter of annual and quarter-over-quarter growth since national remodeling activity bottomed in 2011. Zonda said the RRI has averaged annual gains of 12.3% over the last four quarters. The last time the RRI average YOY increases of 10% or more was in 2005.
The second quarter RRI reading was stronger than initially forecast and Zonda said expectations for the remainder of 2021 have firmed as well. Annual growth in 2021 is now expected to beat 2020’s growth by 0.2% and the RRI model now predicts remodeling and replacement activity will decrease slightly in 2022 before growing thereafter. The first quarter 2021 RRI projected remodeling growth would only flatten in 2022 before growing in 2023.
The updated forecast reflects expectations that the housing market will cool off in 2022 as mortgage rates rise. The RRI is projected to average annual growth of 9.7% in 2021 before a decrease of 1.6% in 2022. In 2023 and 2024, the RRI forecasts stable growth rates of 2% for the remodeling market will be observed.
The remodeling and replacement market has experienced historically strong rates of growth in the middle of 2021, coinciding with red-hot activity in the existing home market, according to Zonda. Existing home sales reached their highest levels since 2006 in 2020 and despite the emergence of some buyer hesitancy due to soaring prices, sales are expected to grow by 6% in 2021. Zonda forecasts that as mortgage rates tick higher in 2022, sales and price appreciation will moderate, leading to a cooling of the housing market. Subsequently, year-over-year comparisons for remodeling activity are also expected to taper in 2022.
Zonda said continued GDP growth and employment will help buoy remodeling activity when the housing market cools. However, the emergence of the COVID-19 delta variance and non-transitory inflation represent risk factors for the market’s future recovery.
Zonda estimates the number of pro-worthy remodeling projects worth $1,000 or more completed in 2020 was 14.4 million. For 2021, Zonda forecasts the number will increase to 15.7 million. While demand remains strong for remodelers and homeowners are increasingly willing to spend on larger discretionary projects once again, shortages in qualified labor and building products are limiting some project potential and creating backlogs, according to Zonda.
As part of the RRI estimation, Zonda predicts 382 of 384 observed metropolitan statistical areas will see growth in annual remodeling project volume in 2021. Among those markets, the average growth rate is expected to be 8.2%
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.