With revenues close to $300 billion in 2013, the remodeling market has nearly fully recovered from the downturn that began in 2008, says Kermit Baker, senior research fellow at the Joint Center for Housing Studies of Harvard University.
Not only that, Baker says the industry grew another six percent in 2014, setting the stage for a record year in 2015.
“At $300 billion, spending on home improvements is nearly as large nationally as spending on new home building,” Baker said. “Moving forward, the two sides will continue to even out. Our population is growing slowly, so we don’t need a lot of new homes, but we do have plenty of old homes that need fixing up.”
Baker spoke last week at the monthly lunch meeting of the Remodeler’s Council of the Homebuilders Association of Greater Chattanooga. His topic: the future of the home improvement industry.
Baker said baby boomers spent the biggest chunk of the $300 billion in 2013 and continue to be highly active remodelers. However, tomorrow belongs to the group that currently is spending the least amount of money on home improvements: millennials.
“Future growth is dependent on the people who today are under 30,” Baker said. “So we’re going to have to figure out how to serve their needs and engage them in the market.”
According to Baker, millennials spent only 2.6 percent of the home improvement industry’s $300 billion in revenues in 2013. Although this should come as no surprise since people under 30 rarely remodel their homes, he said, he is concerned about their lack of interest as they enter their prime home improvement years - 35 to 55 years of age.
“Millennials have largely delayed household formations because they can’t find jobs. Those who have formed households have delayed marriage, and those who have gotten married generally have delayed having children,” Baker said. “But we need to care about them because they’re the largest generation in our history. They’re our future.”
During his talk, Baker identified three areas of growth for the remodeling industry: reinvesting in the rental stock, accommodating the aging population, and doing environmental sustainability upgrades.
Baker said renewed interest in renting combined with an aging rental stock makes the rental market an attractive option. “There wasn’t a lot of spending on rental units during the housing boom because people wanted to buy houses, and during the downturn, no one was spending money on anything,” he said. “Now that younger households that can’t afford a mortgage, or don’t want to risk buying a home, are interested in renting, we’re seeing more rental units being built.”
The average age of a rental unit in the country is 41 years, so more money is being spent on improvements as well, Baker said. Spending on rental unit renovations improved 40 percent from 2010 to 2014.
Baker said “aging in place retrofits” also offer a lot of opportunity for remodelers. Although the market is complex, he said the Joint Center has identified three features that are considered essential in homes for the elderly: having a bedroom and a full bath on the entry level of the home; having no steps between rooms; and having a home entrance with no steps. Only 25 percent of homes occupied by people 55 and older have all three.
Baker said sustainability shows promise as well, with the largest remodelers earning close to 30 percent of their revenues on energy efficient retrofits.
While the home improvement industry is still growing, Baker said a lack of labor continues to be a key obstacle to remodelers being able to take advantage of the available opportunities. “The size of the construction labor force has declined significantly since the last peak of the market,” he said. “This industry relies heavily on foreign-born workers and people with vocational training rather than a college degree, and it doesn’t employ many women. Plus, our work force grew older during the downturn, and we haven’t been able to recruit younger workers. As we rebuild the workplace, we need to figure out how to attract younger workers, immigrants, and women to the workforce.”
Nationally, women make up 2.5 percent of the construction labor force.
Baker said homeowner reliance on cash rather than credit when paying for home improvements present another challenge for remodelers. Although housing prices continue to recover, bringing average home equity levels back to near pre-downturn levels, the industry still relies heavily on cash.
“Cash customers have a hard budget in mind,” Baker said.
Finally, Baker said discretionary spending - spending on the projects homeowners do when they’re feeling comfortable with the economy or their own financial situation - such as bathroom and kitchen remodels is still struggling.
Regardless, Baker said the remodeling market should be fully recovered by the end of 2015. “Although the outlook is for single-digit gains this year, we expect that to pick up as broader housing market indicators improve.”