Zonda’s Residential Remodeling Index (RRI) fell on a quarter-over-quarter basis for the first time since 2011 in the first quarter of 2023. According to Zonda, the sequential decline marks the beginning of a projected moderate cyclical downturn in the overall remodeling and replacement sector.
Despite the decline, the RRI reading of 164.8 indicates the current level of overall remodeling activity is 64.8% higher than the baseline year of 2007. The reading marks a 2.6% increase on a year-over-year basis, but is sequentially 0.7% lower than the fourth quarter of 2022.
Zonda projects the RRI will experience year-over-year declines from the second quarter of 2023 through the third quarter of 2025. On an annual basis, the index is forecast to decrease by 1.1% in 2023, 2.8% in 2024, and 0.5% in 2025. While growth will be negative on a year-over-year basis, the elevated level of remodeling activity during the COVID-19 pandemic will mean overall activity will still hover around 60% higher than the 2007 baseline. Zonda says the decreases are due to expected corrections in home prices and an economic slowdown; the risk of recession is “still high,” according to the company.
Moody’s Analytics, an economic research company that forecasts variables used by Zonda in the RRI model, says existing home prices are still too far detached from incomes and a correction is needed to restore affordability and significantly improve buyer demand. If a recession were to manifest, Moody’s predicts a 20% decline in national median home price peak-to-trough. While the slowdown in existing home sales will reduce some remodeling activity in the short-term, it will be offset by many homeowners choosing to stay and improve their current homes. According to zonda, the more negatively weighted variable for remodeling outlook is decreasing home values and their impact on tappable equity and homeowner confidence.
According to Zonda, there are several factors that will help to mitigate the short-term impacts that moderating home prices and fear of an economic slowdown will have on remodeling activity, including the excess savings rates for most Americans. Additionally, the current housing cycle saw low exposure to subprime mortgages, suggesting a large collapse in home prices like in the aftermath of 2008 is unlikely.
Additionally, several long-term trends, including a wave of household formation, the overall aging housing stock, and homeowners unhappy with the homes they purchased during the frenzied COVID period, will contribute to remodeling demand beyond the impending economic slowdown.
In 2022, Zonda projects the nation undertook 17.6 million pro-worthy remodeling projects; in 2023, the number is projected to decrease to 17.4 million. For 2023, 208 metropolitan statistical areas analyzed by Zonda are projected to see growth in annual project volume; among these markets, the average growth rate is expected to be 2.0%.
