New research suggests remodelers should focus more on the Realtor mantra of "location, location, location" rather than use national numbers when they assess boom-and-bust spending cycles in their market.
Harvard University's Joint Center for Housing Studies' (JCHS) Remodeling Futures Program reported in a study released July 31 that remodeling cycles in Chicago, Detroit, Los Angeles, New York, and Philadelphia "appear to be influenced by the relative strength of weakness of local economic and housing market conditions. In particular, change in home values stands out as a strong indicator of metropolitan remodeling activity."
"Ultimately," JCHS' Abbe Will concluded, "local home price cycles may be reliably good proxies for remodeling spending cycles in metro areas for which historical home improvement data is unavailable."
JCHS based its conclusions on a study of data from the federal government's American Housing Surveys between 1995 and 2015. The center focused on five metro areas (which together account for 14% of all homeowners and 19% of remodeling market spending nationally) because they had the most consistent historical data.
Nationally, on an inflation-adjusted basis using 2015 as the base, spending per owner on home improvement averaged about $2,600 each year between 1994 and 2015, JCHS said. Over those years, there was about a 26% percent swing from peak to trough. And while the five markets studied in detail also had their ups and downs, the force and timing of those cycles varied.
For instance, Los Angeles experienced a 64% peak-to-trough swing during that period, while Philadelphia far more stable with only a 23% change. The New York market has seen a 73% rise in remodeling spending from its low point, while in Chicago the change has been just 16%. And Detroit in 2015 was only 2% below its peak level while Los Angeles is 50% under its highwater mark.
In other words, JCHS concluded, Los Angeles and New York had relatively high volatility in remodeling spending, Chicago was moderate, and Detroit and Philadelphia experienced low volatility.
Why? JCHS says there's a correlation between changes in a market's median home values and its local home improvement spending. "[T]he volatility in metro house price cycles also closely aligns with the amount of volatility in home improvement spending cycles," JCHS' Will added. "... This finding, along with the strong correlation coefficients for home prices and remodeling spending, suggest that metro-level home value cycles could be fairly good proxies for the local remodeling cycle in terms of pace and timing of upturns and downturns."