Aging Americans, Aging Housing Stock Driving Remodel Boom

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Sharp Credit – Credit News – Credit Information

Nearly 80 percent of America’s housing stock is at
least 20 years old and twice that share of homes were built 50 or more years
ago. With new construction still well behind its pre-recession levels Americans
have been remodeling these older homes in huge numbers. 

The Joint Center on Housing Studies says there was
$425 billion spent nationally on maintenance and improvement, a 10 percent
increase from 2015 and more than a 50 percent gain from the 2010 low.  In fact, that spending, by both owner
occupants and landlords, has been the dominant share of residential investment
in the years since the recession and generated 2.2 percent of total economic
activity in 2017. 

 

 

Spending for improvements on rental properties are a
larger share of spending than the historic average of 25 percent. A surge in
renting during the Great Recession drove a boom in multifamily construction,
but rising construction costs put rents on new units out of reach for many so owners
of existing rentals invested in significant upgrades to their properties to capture
some of this demand, driving the rental share of residential improvement from
about 20 percent in 2007 to over 30 percent in 2016 and 2017.

The foreclosure crisis left many homes vacant for
extended periods
and there was also widespread conversion of owner-occupied
housing to rentals. As homeownership demand started to recover, the number of vacant
or rental homes moving back into owner occupancy has grown, increasing from 5.0
million in 2010 and 2011 to more than 6.6 million in 2016 and 2017.  With home construction lagging homebuying
demand, these units make up a growing part of the owner-occupied stock.

Spending by owners of these newly converted homes
increased from $33 billion in 2010-2011 to $50 billion in 2016-2017, while
average per owner spending rose from $6,500 to $7,500.  Owners spent more than double on homes that
had been vacant than where they had been rented ($10,400 versus $4,500) Spending
on homes that remained owner occupied averaged only $5,500. Spending for
kitchen and bath remodels and room additions were especially high among the conversions.

Improvements to owner-occupied homes accounted for 55
percent of total expenditures in 2017. 
The
Joint Center analyzed data from the most recent American Housing Survey (AHS) for
its recent publication, Improving America’s
Housing 2019
.  It shows that 22 million
US homeowners completed at least one home improvement project that year. These
ranged from a relatively simple window or door replacement, to HVAC replacement,
to a complete kitchen remodel or room addition.

Most projects were small; 40 percent reported spending
less than $2,500 and three-quarters spent less than $10,000. Even so, owners
spending $50,000 or more contributed one-third of the total $233 billion spent
by homeowners in 2017 while those spending at least $25,000 accounted for more
than half.

Spending on replacement projects has historically
matched spending on discretionary fixes such as additions or bath remodels with
about a 40 percent share.  Since the
recovery however the replacement share has grown to almost 50 percent.  This increase in replacements and system
upgrades probably reflects necessary work deferred during the recession as well
as the aging of the housing stock. With lagging homebuilding, the median age of
owner-occupied homes has grown from 29 years in 1997 to 39 in 2017.  

Homeowners spent $68 billion or 29 percent of the
market total on improvements increase the energy efficiency of their homes;
replacing roofing and windows, adding insulation. Over 17 percent of homeowners
cited energy efficiency as the motivation for their projects, up from 11
percent in 2013. This was especially true in metros with older homes and harsh
winters.

 

 

Spending on disaster recovery is also growing, both in
absolute terms and as a share of expenditures.  Outlays for disaster-related improvements
exceeded $27 billion in 2016-2017, nearly double the two-year average of $14
billion two decades earlier.  This spending
growth has been especially strong in the South and Midwest.  While insurance payouts covered most of disaster
repair costs, homeowners paid out of pocket for more than four in ten projects
in 2016-2017.  Where there were insurance
payouts owners spent $20,000 on average for restoration projects in 2016-2017,
but just $12,000 if they paid for the repair of disaster damages on their own.

 

 

The share of spending on do-it-yourself (DIY) projects,
which includes only the material costs, fell steadily from 25 percent in 1997 to
just 18 percent in 2017.   The aging of
the US population explains at least part of this long-term decline. In 2017, 88
percent of improvement money spent by homeowners age 65 and over was for
professionally installed projects compared with 69 percent by owners under age
35.  The younger groups DIY share of
outlays has also trended down, from 35 percent in 1995-2005 to 31 percent in
2017.

The increase in replacements also tilt spending away
from DIY. Even talented DIYers are likely to hire professionals for electrical,
plumbing, and roofing
upgrades. Indeed, 86 percent of spending on replacement
projects in 2017 was for professional installation, significantly more than the
76 percent share for discretionary projects.

Per-owner
spending on home improvements in 2017 averaged $3,000 and half of all
individual project spending was under $1,200. Households typically (77 percent)
pay for these small projects out of pocket. 
The rest was paid for through credit or retail store charge cards (5
percent), home equity loans or lines of credit and cash from mortgage
refinancing (5 percent), and insurance settlements (4 percent).  Nine percent came from “other” sources such
as contractor financing or personal loans.  

The share paid with cash steadily shrinks on larger
projects, from 78 percent of projects under $10,000 to 60 percent for those costing
$10,000 to $49,999, 54 percent for those costing $50,000 or more. Financing is
more likely to come from home equity loans or cash out refinances as well as
insurance settlements.

 

 

Financing varies as well by type of installation.
Owners paid cash for 84 percent of DIY projects compared with 72 percent of
work done by professional contractors. Landscaping, security systems and
walkways/driveways are most likely to be paid out of pocket while roofing, siding,
and additions are financed from other sources.  The cost of a project tends to be higher where
financing is used instead of savings.

The steady increase in home prices since 2011 has been
good news for the remodeling market.  Knowing
that their homes are increasing in value incentivizes owners to invest in them,
and the growing equity can provide the funds to do so.  This relationship is clear at the
metropolitan area level.  In metros with
strong home price growth in the last decade, areas like Boston, Dallas, San
Antonio, San Jose, San Francisco, and Seattle, owners have typically spent
substantially more on home improvements than owners in metros where prices have
not yet fully recovered like Las Vegas, Miami, Phoenix, and Riverside.

However, there are limits to this relationship.  Home prices have outpaced income growth for
several years and when coupled with rising mortgage interest rates are making homeownership
increasingly unaffordable especially to many younger households-the demographic
most critical to long-term growth of the home remodeling market.

Other factors may mitigate against the remodeling
market as well.  Mobility, the rate at
which the population changes residences each year, has declined by almost half
over the past four decades and homeowners typically spend 25-30 percent more on
remodeling projects in the first few years after relocating than do those who
stay put.  This slowdown is due in part
to the aging of the population
, the decline in household size, and advances in
technology that have made telecommuting an alternative to relocation.

Another potential problem is the depressed
homeownership rate among younger households.  Homeowners under age 35 have accounted for
only 8-9 percent of home improvement spending annually since 2012, about 5
percentage points less than their average share over the 1995-2011 period.  An exception is areas where homeownership is
relatively affordable. There younger households do contribute significantly to home
improvement spending.

While homeowners aged 35-54 have the highest per
capita spending on home improvement, their share of market spending has declined
from more than 50 percent in 1995-2005 to just 41 percent in 2015 with the
leading role taken by homeowners over age 55. Their numbers have grown from 26
million to more than 42 million between 1997 and 2017 and their share of all
homeowners increased from 40 to almost 55 percent.  

These older homeowners are living longer and are
willing and able to spend on improvements that allow them to remain safely in
their homes
as they age. Their average spending increased by 57 percent during
that period, to nearly $2,800. In aggregate these changes have increased spending
among older owners by 150 percent to $117 billion.  By comparison, total market spending was up
just 9 percent among owners under age 35 and 12 percent among owners aged 35-54
over this period.

The growth in spending by those over age 65 was
especially strong, up nearly 80 percent to $2,500 in the 20 years.  Spending by those aged 55 to 65 increased 33
percent while spending among those 35-54 was only 20 percent higher after 20
years.

Older homeowners tend to devote a larger share of their
improvement dollars (51 percent) to replacing home components and systems than
younger homeowners (43 percent) and are increasingly focused on making their
homes more accessible.  More than 72
percent of those over 55 reported undertaking at least one project to improve accessibility
for the elderly or disabled. These are likely to be more expensive such as
bathroom and kitchen remodels or room additions to allow single-floor living.

Older homeowners are dominating the market in part
because of the low homeownership rate of younger households since the Great Recession.
But the number of homeowners under age 35 did rise 6 percent to 7.3 million
between 2015 and 2017.  Improvement
spending among this age group grew even faster, climbing 20 percent in real
terms over this period to about $22 billion and average per owner improvement
spending rebounded 38 percent from $2,100 to $2,900 between the 2013 low and
2017.  Per owner spending among younger
owners in 2017 nearly matched the prior peak of $3,000 in 2007.  In part this is because younger homeowners
have higher incomes than those than the older cohort who were more impacted by
the Great Recession.

What does the report see for the future?  The Joint Center says household growth alone
should lift the number of homeowners over the next two decades. But as more
lower- and middle-income households move into homeownership the recent jump in
per owner improvement spending among the youngest cohort is likely to slow to a
more sustainable pace.  Still, the expected
growth in their sheer numbers should more than offset slower spending and keep expenditures
on the rise. Nonetheless, the report says, the ability of younger households to
make the transition to homeownership is ultimately the key to the remodeling
market outlook.

The growing number of older homeowners coupled with
older homes that are not configured for accessibility will continue to drive
aging-in-place accommodative spending.  This
will be especially true in slower-growing areas of the Northeast and Midwest
where building of new homes, more likely to have accessibility features, is
more constrained.

The share of replacement projects is likely to remain
high as the housing stock ages and the number of older homeowners grows. Since
these are projects generally requiring professional installation, the DIY share
of spending is expected to remain relatively low.

Low energy costs of late has reduced the payback from those
types of upgrades. If prices remain subdued the motivation to undertake further
energy retrofits may also be limited.

At the same time, disaster recovery spending is likely
to climb.  The Joint Center says recovery
from an event is usually spread over two or three years so there may already be
a backlog of work from the 2016-2018 spate of hurricanes and wildfires.  If the trend of stronger and more frequent
events continues, so will related expenditures increase.

Financing home improvement is a promising growth
opportunity. Heavy reliance on savings limits homeowners’ options. Expanding
the types and availability of new financing alternatives-especially those tied
to home equity- would likely lead to more growth in remodeling while helping to
preserve and modernize the nation’s housing stock.



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