Market Memo

The sharp growth in remodeling activity over the past 10 years has been due in large part to the enormous growth in discretionary remodeling spending.

Discretionary remodeling encompasses the sexy part of the remodeling market — the huge whole-house remodeling projects, the luxurious kitchens and baths — that have been so prevalent in recent years. In some respects, upscale projects and other elective projects have fed a “Houses as Bling” mentality. But there was much more than mentality driving the growth of these jobs. It was based on strong consumer confidence. And that confidence was based, to a large degree, on the growth in value of personal assets, particularly the value of houses.

In many places around the country, a home purchased in 1996 very likely doubled in value by last year. This not only increased the net worth of millions of Americans, it also made them feel richer. With house prices rising year-after-year, there was a willingness to tap that equity and spend it. But last year, as we all know, the housing market shifted. House prices began declining in many places. And it has thrown a wet blanket on consumer confidence and discretionary remodeling spending.

Where are house prices headed from here? It depends on who you ask.

The Federal Reserve put out an authoritative study of house prices historically as compared to rents. The study concluded that even with last year’s housing price declines nationally, an imbalance of up to 15 percent still lingers in the market. In other words, look for house prices to decline up to 15 percent more during the ensuing months. The speed at which those prices decline is of critical importance, say the experts. A quick pullback will allow the market to “re-set” and begin to move up again. A longer timeframe of two or three years might actually be worse for the housing market, some argue. That would post-pone market re-set and prolong the period of uncertainty that the housing market is currently experiencing.

Thankfully, the remodeling market is not comprised entirely of discretionary activity. The bedrock of the market is comprised of necessary work — maintenance and repair. There are approximately 130 million homes in the United States. Their average age is over 31. As these homes age, maintenance, repair, renovation and remodeling will be required. And no matter how consumers feel about the value of their portfolios, work that needs to be done usually gets done. Homeowners must protect the value of their asset. That is why remodeling tends not to slow down as much as new home construction during housing downturns. There is a huge base of ready business. This year, instead of getting calls for $100,000-plus room additions, the calls will likely be more moderately priced and more needs-based.

This entry was posted on Thursday, January 24th, 2008 at 1:55 pm and is filed under Market Memo. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.