Better Projects, Faster Recovery? It’s All About Cost. – Builder Magazine

In comparison to the bottoms that new residential construction and architecture billings reached during the Great Recession, the remodeling sector shrank less. In 2009, while many small builders went out of business and architects found themselves with fewer prospects, home improvements actually got a slight boost, backed by the Obama administration's economic stimulus package featuring tax benefits for remodeling projects. According to Metrostudy's Residential Remodeling Index (RRI), remodeling activity actually didn't hit its bottom until the tail end of 2011when the stimulus package ended, and the false dawn of a recovery in the sector was realized.

Since then, it's indisputable that remodeling activity has recovered at a far faster pace than new residential construction activity. The latest quarterly AIA Home Design Trends Survey (released in March) reported that amid the sectors responsible for work at architecture firms, remodeling still accounts for the largest share of business activity--a trend seen in results of the quarterly survey since the recession began. More specifically, demand for home additions and alterations account for the largest share of design activity, followed closely by kitchen and bath remodels.

According to REMODELING's annual Cost vs. Value report, the national average cost of a midrange kitchen remodel (minor or major), midrange bath remodel, and additions (be it a two-story, family room, or bathroom) are among the top 10 most expensive home improvement projects. They also are generally regarded as discretionary projects, as opposed to replacement work like installing a window or door when the old one breaks.

Craig Webb, editor-in-chief of REMODELING, says he has found that when times are hard and home prices are sluggish, the real estate professionals who provide value estimates in the Cost vs. Value project tend to be harder on discretionary rather than replacement work. After all, it's hard to sell a home at full price when the potential buyer can clearly see something that's broken. In addition, researcher at the Joint Center for Housing Studies at Harvard University (JCHS) have found that people are less likely to commission discretionary projects during a downturn; the percentage of discretionary jobs as a share of all home improvement dropped from more than 40% in 2007 to around 33% in 2015. That makes sense, too: Consumers need to use their money for other things.

But since then, Webb says he's noticed that the payback at sales that real estate pros give for higher-priced remodeling projects have risen faster these past few Cost vs. Value surveys than has the payback for replacement work. Webb takes that as a sign real estate pros feel confident prices will keep rising, so an investment in a big-ticket project will be justified at resale. So remodelers should rejoice: Going forward, "investment in discretionary projects is expected to drive overall market growth," JCHS predicts.

High demand for the most expensive projects is nothing but good news for remodelers, as prices rise alongside demand. Over the past nine years, the national average cost for the 10 most expensive midrange projects in the Cost vs. Value report has grown significantly, following a dip after the fallout of the stimulus package. In 2017, the national average cost of the top three most expensive midrange projects all surpassed 2008 prices by over 20%.

The chart below breaks down the change in national average cost for the three most expensive midrange projects between 2008 and 2016, compared to 2017:

Compared to 2017, price growth of the three most expensive home improvement projects on average increased by double-digits in 2013 and 2014. While price growth has slowed in 2015 and 2016, it represents a much more stable growth that matches rising demand and is expected to continue.

The latest RRI release indicates that 2017 will be another big year for the remodeling sector, with the expectation that remodeling activity will rise 4.4%. The index has shown gains year-over-year for 19 consecutive quarters since 2011, but most significantly, the 4Q16 release reported that all 281 metropolitan statistical areas included in the index are expected to post annual gains in remodeling activity during 2017a first for the index.

Buyers face a tight resale market and new home prices continue to reach new highs (the S&P CoreLogic Case-Shiller National Home Price Index exceeded its July 2006 peak in November 2016), making remodeling a favorable option for prospective buyers priced out of the new home market, and current homeowners hesistant to buy up. Compounded by employment growth and rising household income, Metrostudy chief economist Mark Boud anticipates the sector will continue to heat up over the next five years.

Remodelers are facing some of the same challenges as builders however, with labor shortages and the rising cost of materials threatening rising job costs that could turn off potential customers.

The drivers of potential growth in remodeling activity outnumber the deterrents, however. As droves of baby boomers prepare for retirement, rising mortgage rates (along with lack of affordable new homes and tight resale inventory) could deter boomers from uprooting in favor of making home modifications that allow aging-in-place.

Mortgage rates are forecast to increase through 2017 and beyond. We will be watching closely to see what happens in the remodeling market, when mortgage rates surpass the 5% mark," Boud said in the latest release of the RRI. "Higher rates will slow home sales and price appreciation, but the net positive for the remodeling industry will be a large number of households staying in the homes they locked-in at the 4%-or-below range, and choosing to renovate there."

And keep in mind that the baby boom generation has never operated in lockstep. Yes, a large number of boomers will want to stay where they areJCHS notes that health or financial reasons are likely to force boomers to leave as many as 12 million housing units between 2015 and 2025. "Many of these homes are well-suited for younger families in that they are typically older and more affordable," the Joint Center writes. "And given that older households generally live in their homes for some time and spend little on improvements in their later years, younger buyers of these homes will likely want to invest in significant upgrades."

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Better Projects, Faster Recovery? It's All About Cost. - Builder Magazine