Washington, DC, October 31, 2022 – The housing market has cooled, but home improvement spending appears well insulated for now, reports the Wall Street Journal.
“The US real estate market is getting hammered, and that looks set to dampen the home improvement boom. But, even if spending looks set to slow, there are reasons to believe that it might not.
“The rapid rise in mortgage rates has turned housing from hot to cold. The number of used homes sold last month was down 24% seasonally from a year earlier, according to the National Association of Realtors.
“Last week, Freddie Mac reported that the average rate on a 30-year mortgage had hit 7.08% – the highest since 2002 – pressures on housing affordability are only getting worse. The drop in home sales eliminates a few important reasons people are fixing their homes. Those looking to sell often spend money on upgrades in hopes of making the selling process smoother or getting a higher price. Recent buyers often spend money on upgrades to make their newly purchased homes better match their wants and needs. Researchers at Harvard’s Joint Center for Housing Studies place a heavy emphasis on sales of existing homes in their forecasts of home improvement and maintenance expenses.
“But rising mortgage rates and fewer moves don’t necessarily translate into lower demand for home renovations. During Lowe’s last earnings call, chief executive Marvin Ellison referred to the mid-1990s, when home improvement spending rose despite rising interest rates and a slowdown in housing turnover.
“There are other factors to consider beyond home sales. The Harvard JCHS forecast model also includes sales at building supply stores, renovation permits, gross domestic product and the Conference Board’s index of major economic indicators – itself an amalgamation of data such as applications weekly unemployment and manufacturing orders – as inputs.
“It’s not easy or clear,” says Father Will, senior research associate at JCHS. “We see headwinds, but there are also tailwinds.”
“The JCHS model predicts that maintenance and improvement spending will increase 6.5% in the 12 months ending in the third quarter of 2023 compared to a year earlier – a sharp deceleration from the growth of 17, 8% recorded in the comparable period that ended in the third quarter of this year, but still growing. Likewise, a survey by the National Association of Home Builders shows that optimism among home remodelers is still high.
“Home improvement companies themselves remain optimistic even after two years of pandemic-fueled growth. Mr Ellison said on the Lowe’s earnings call that the three factors that have historically been most correlated with demand for the company’s products – house price appreciation, age housing stock and personal disposable income – remain strong. Home Depot CEO Ted Decker told a conference last month that customers remained “very healthy”, estimating that US home values had increased by $8 trillion to $9 trillion over the past month. of the last two years.
“Paint seller Sherwin-Williams, which reported earnings more recently, said it continued to see strong demand from business customers but was more cautious about 2023, noting new residential demand is expected to slow down.
“One source of the underlying demand for home improvement is that, thanks in part to years of disappointing construction activity, American homes are aging.
“The median age of an owner-occupied home in 2021 was 40, according to the Census Bureau, up from 29 in 2000.
“The aging home continues to demand more renovations, more updates,” Sherwin-Williams CEO John Morikis said on the company’s earnings call on Tuesday.
“Houses aren’t all that ages: According to the Census Bureau, 56 million people, or 17% of the US population, were 65 or older last year. By 2030, this cohort will grow to 73 million. Many aim to “age in place”. For some this means moving to a more suitable home, but for others it means remodeling to suit their needs.
“The recently passed Reducing Inflation Act includes new incentives for renovators, including tax credits and rebates for various energy-efficient home improvements, such as replacing windows, installing solar panels and the installation of electric heat pumps, all of which last until at least 2032.
“Homeowners also have the means to continue spending on their homes. Scot Ciccarelli, retail analyst at Truist Securities, points out in a recent report that nearly 40% of homes in the United States are owned, and most of the rest have mortgages locked in with low rates. It’s true that falling house prices may put a damper on that: A Federal Housing Finance Agency house price index was 1.3% below its June peak in August, though that still puts it 12% higher than a year earlier and 112% higher than a decade since. If prices take steep declines, people might conclude that the returns on their home improvement investments won’t be worth it.
“But the biggest tailwind for home improvement spending could be the job market.
“Wages are on the rise, and for many homeowners with fixed-rate mortgages, income gains exceed housing costs, so people are less worried about regretting spending money to fix their property. home.
“All of that would change in a weaker labor market. If the Federal Reserve’s rate hikes slow the economy to the point that it starts shedding jobs, the impetus will be to save, not spend. In this case, it could be Katie barring the door, because people can’t afford to replace her.