Zonda’s Residential Remodeling Index (RRI) posted a record reading of 150.2 in the third quarter of 2021, marking a gain of 12.1% on a year-over-year basis. The RRI reading indicates that big-ticket residential remodeling spending increased 1.2% from the second quarter of 2021, the 38th consecutive quarter of quarterly growth since remodeling activity bottomed in 2011.
The reading of 150.2 indicates current remodeling and replacement activity is 50% higher than the old peak for remodeling activity in 2007. Despite construction labor and materials shortages, remodeling growth has been historically strong in 2021 and will “easily beat 2020,” according to Zonda. The RRI is expected to post an annual gain of 12.4% for the full year in 2021; the last time an annual increase of 10% or more was achieved was in 2005.
Remodeling activity’s strength has emanated primarily from the housing sector, even as the broader economy continues to be impacted by the COVID-19 pandemic. Existing home sales are expected to end 2021 6% higher than 2020 and will represent the highest volume since 2006. Zonda said home prices reached record levels during the year and the median existing home price is projected to appreciate 14.7% for all of 2021. Home renovations have been spurred by strong housing turnover and boosted by homeowners tapping into their equity, according to Zonda. Zonda projects that, as is expected in a rising interest rate environment, the refinance market will shift from rate and term refinances to a higher volume of cash-out refinances, which bodes well for spending on both large and small home improvement projects.
Zonda said some of the strongest correlations in the RRI model are tied to existing home prices and sales. Thus, as the housing market is projected to relax in 2022, so, too, is remodeling and replacement activity. Zonda forecasts the RRI will see a 0.8% decrease in 2022 before expected growth rates of 1.6% and 2.0% in 2023 and 2024. Even with the relaxation expected in 2022, remodeling activity in the U.S. is expected to remain historically elevated, and “a more normal housing market will be well received by a deep pool of qualified Americans who still want to buy a home,” according to Zonda.
The uncertainty of when the supply chain bottleneck and inflation will end add caution to short-term projections. Some economists project both issues will resolve in the middle of 2022, while others forecast an end closer to the final months of 2022. Although the supply chain is expected to return to normalcy over the next 12 months, Zonda said there does not appear to be a quick solution to the shortage of construction workers and skilled tradesmen. The labor shortage crisis has worsened over the past couple years, and a recent report from the Home Builders Institute (HBI) estimates the construction industry needs an additional 2.2 million new hires from 2022 through 2024 to keep up with demand.
Zodna estimates the number of pro-worthy remodeling projects worth $1,000 or more completed in 2020 was 14.2 million. For 2021, the number of projects is forecast to increase to approximately 16 million.
As part of the RRI estimation, Zonda predicts all 384 observed metropolitan statistical areas will record growth in annual project volume in 2021. The average growth rate across all markets in 2021 is expected to be 11.2%.
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.