After Recession, Home-Remodeling Is on the Rise

By Kathleen Madigan for WSJ blogs

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Renovation nation’s rising again.

Wednesday’s report on housing starts suggests a steady trend for construction. But new houses aren’t the only support to economic growth. Updating a bathroom or adding a deck also contributes.

The Bureau of Economic Analysis tracks home improvements as part of the residential investment sector of gross domestic product. (Single-family homes, the fast-growing apartment sector, dormitories and manufactured homes are also in the residential investment category.)

“These are major improvements to your house,” says Michael Armah, a BEA economist. That includes major replacement projects, adding a room and rehabbing a kitchen. Painting a living room or installing a dimmer switch doesn’t count.

Like other subsectors of home construction, spending on improvements took a hit in the recession. So far in this expansion, apartment-building has been the lead construction performer because of a consumer shift to renting rather than owning.

But remodeling spending has also climbed back, thanks to the usual upkeep and maintenance, as well as the decision of some homeowners to upgrade or expand their current residences rather than move.

Rising home values have also helped. In Home Depot HD +1.17%‘s earnings call Tuesday, the building-supply retailer’s chief executive Craig Menear said, “As home value appreciation has happened, customers are certainly more willing to invest in their homes.”

Inflation-adjusted spending on home improvements has slipped a bit in 2014, but in the third quarter it stood just 10% below the subsector’s peak in 2005.

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In contrast, investment in new single-family homes is still a large 62% off its high of the boom years.

Indeed, real spending on improvements is currently running about even with spending on single-family homes. During the housing boom, investment in new single-family housing outpaced home improvements by a ratio of more than 2.5:1.

The return of renovation nation is supplying work to contractors who might otherwise be idle and increases demand for building supplies. It also supports growth in sales of appliances, home textiles and furniture.

According to the National Association of Home Builders, a $100,000 remodeling project generates 0.89 full-time job over the course of a year. That compares favorably with 2.97 annual jobs generated by the construction of the average $323,000 new single-family home.

The outlook for home-improvement spending remains solid. Many homeowners are going ahead with plans for a new kitchen or finishing the basement.

The NAHB’s remodeling market index returned to its record of 57 in the third quarter, and the future market index rose to a high 58. Readings on backlog and amount of work committed for the next three months increased, suggesting remodeling will contribute further to economic growth in coming months.

–Michael Calia contributed to this article.

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