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Home Remodeling Projects Expected To Increase

According to the Leading Indicator of Remodeling Activity (LIRA), a tool developed by the Remodeling Futures Program at Harvard University, the second quarter of 2013 witnessed an upward trend in home remodeling projects. At the time, the return of equity had finally permitted homeowners to invest in their properties. Small home renovations actually contributed to the stimulation of both the housing sector and the entire U.S. economy. Of particular interest, however, is data that suggests this trend will continue throughout the first half of 2014. By all accounts, this is a good indicator for the real estate industry.

As recently as October, LIRA projected the upward trend of remodeling projects to continue through the first quarter of 2014. However, encouraging signs within the industry have resulted in a recalibration of the proposed expectations. LIRA now expects the remodeling boom to continue through the first half of the year. But the rate of that growth has been downgraded from October estimates.

With the housing sector in the midst of what appears to be a sustainable recovery, home prices will continue to rise. As prices climb, homeowners will become the beneficiary of lost equity. The reduction of underwater mortgages will inject more money into the market. This alone will allow homeowners to conduct renovation projects on their own accord. It also explains the recent extension of LIRA remodeling projections.

LIRA now expects that double-digit gains in spending will continue through the first half of the year and then moderate to just under 10 percent by the third quarter. However, a gain of 15.9 percent in the three month moving average to $146.1 billion originally predicted for quarter four (2013) is now put at 11.4 percent and $140.4 billion.

Despite the extension of double-digit gain projections, the rate in which they will change is more restrained. The original estimate of a 17.3 percent moving average increase in the first quarter is now 14.0 percent. The second quarter’s original projection of 16.2 percent has been modified to 14.7 percent. By the end of the second quarter, LIRA estimates home improvement spending at $147.6 billion before growth moderates to a moving average of 9.9 percent in the third quarter.

“The ongoing growth that we’ve seen in home prices, housing starts, and existing home sales is also being reflected in home improvement activity,” says Eric S. Belsky, managing director of the Joint Center. “As owners gain more confidence in the housing market, they are likely to undertake home improvements that they have deferred.”

“However, the strong growth for this cycle may start to ebb a bit beginning around midyear,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center. “By that time, we’ll be approaching the pre-recessionary levels of spending, and with borrowing costs starting to creep back up, growth rates are likely to slow some.”

On a national level, LIRA estimates the amount homeowners spend on renovation projects. It takes the current quarter into account, while also projecting the following three quarters. The indicator, measured as an annual rate-of-change of its components, provides a short-term outlook of homeowner remodeling activity and is intended to help identify future turning points in the business cycle of the home improvement industry.

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