Housing Slump Slows Spending on Home Improvements

The current housing downturn is starting to take a noticeable toll on remodeling expenditures for home improvements, according to the latest forecast for the industry from economists at the National Association of Home Builders, although the weakness will be offset to some extent by the growing demand for projects to patch and spruce up homes so that they are more attractive to potential buyers in a slow market.

“While residential remodeling expenditures remained relatively strong through 2006, the ongoing housing market contraction, coupled with the sharp deceleration in house price appreciation, will curb growth in 2007 and 2008, before expenditures recover in 2009,” according to the NAHB forecast.

Overall residential remodeling expenditures will fall below 1% both this year and next, the forecasters say, which represents a decline of 2% in this sector when adjusted for inflation. The industry is expected to return to more robust growth in 2009.

An important factor in the remodeling slowdown is the ongoing housing correction. “The housing boom that included record peaks in housing starts and sales of new and existing homes in 2005 led to a substantial correction in 2006 that has continued into 2007,” the economists say. “It is unlikely that the residential remodeling sector will be completely immune to this slowdown.”

Although total housing activity was a drag on the U.S. economy last year, shaving a quarter of a percentage point from real growth in the gross domestic product, home remodeling improvements contributed nearly one-tenth of a percentage point to growth.

That won’t occur in 2007 and 2008, the forecasters find, with government statistics already indicating weakness in this year’s first quarter.

Census Bureau statistics on residential improvements and repairs for the opening quarter of 2007 showed a 6 percent decline from the same period of 2006 in aggregate remodeling expenditures.

NAHB is forecasting declines in improvement expenditures in both 2007 and 2008 of roughly 3 percent for owner occupants. Spending on improvements in the rental sector will be low or positive, at 3 percent or less, following several years of decline.

With home sales slumping, the industry is seeing less demand from “buyers who undertake remodeling projects as they customize their newly purchased homes to their tastes and preferences,” according to NAHB.

But some counter-cyclical forces are coming into play in the demand for maintenance and repair spending as “sellers invest in remodeling projects in order to maximize the price their sale will command,” the economists say. “As the housing market slows, buyers gain negotiating power, which puts pressure on sellers to address any maintenance or repair issues that may exist.”

“Expenditures for maintenance and repairs will pick up for both owner occupants and rental owners in a counter-cyclical response to the current housing market,” NAHB says.

Spending by owner occupants on maintenance and repair is projected to increase by roughly 9 percent this year and next.

“Expenditures by rental owners will increase by slightly more through 2007 and 2008 as vacancy rates come down, generating cash, and landlords move to maintain rental value and make up for earlier spending cutbacks,” the economists say.