Price gains and low interest rates help U.S. homeowners
Thinking of adding a deck or updating your kitchen? You’re not alone. American homeowners are back in the remodeling business.
After several quarters of slowing growth, home improvement spending in 2016 should accelerate, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies (JCHS) of Harvard University.
The Harvard University program projects annual spending growth for home improvements will accelerate from 2.4% last quarter to 6.8% in the second quarter of 2016.
“Home improvement spending continues to benefit from the last several years’ upswing in housing market conditions, including new construction, price gains, and sales,” Chris Herbert, managing director of the JCHS, said in a release Thursday. “Strengthening housing market conditions are encouraging owners to invest in more discretionary home improvements, such as kitchen and bath remodeling and room additions, in addition to the necessary replacements of worn components such as roofing and siding,” Herbert added.
In January, Harvard’s JCHS said spending nationwide on home improvements in 2015 could easily exceed the record of $324 billion set during the peak of last decade’s housing boom.
The Leading Indicator of Remodeling Activity, which was first used in 1995, is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters. The JCHS says the index is designed to provide 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.
Rising home prices have enabled many homeowners to pull some cash out of their homes in the form of home-equity loans and lines of credit. It has also enabled many homeowners to lower their monthly mortgage payments. All of this has meant people have more money to pay for remodeling jobs.
Refinancing made up 63% of new mortgage applications in the first quarter of 2015, according to the Mortgage Bankers Association.
The median home value in the U.S. is $180,800, up 3.3% over the past year, and it is expected to rise 2.2% within the next year, according to Zillow Z, +1.70% , a real-estate research firm.
Existing home sales are expected to rise 7% in 2015 over 2014 to nearly 5.3 million units, according to the National Association of Realtors, and rise another 3.5% to 5.5 million in 2016.
The Harvard index, however, sounds a note of caution as consumer credit still remains tight, especially for self-employed homeowners.
“Although we expect remodeling activity to strengthen through the first half of 2016, further gains could be tempered,” says Abbe Will, a research analyst at the JCHS. “Current slowdowns in shipments of building materials and remodeling contractor employment trends, as well as restrictive consumer lending environments, are lowering remodeler sentiment and could keep spending gains in the mid-single digit range moving forward.”