Spending less of a household's income on mortgage, taxes, and insurance means more disposable money to make a home look better. The American Housing Survey backs up this assumption with their latest data that shows homeowners, who live in a unit and have a total monthly housing cost of below 30 percent of their income, spent more than $339.2 billion on home improvement. In other words, people who own affordable housing have more purchasing power when it comes to spending on home remodeling.
More than $431.1 billion was spent on home improvement expenses between 2013 and 2015, and we broke down that information into which households spent the most and what they spent it on. We found that (1) affordable housing owners comprised almost 80 percent of total expenses and projects carried out, and the majority spending was $40.7 billion for roofing, $38.2 billion for kitchen remodeling, and $32.3 billion for HVAC. They also spent money on bathroom remodeling, room additions and renovations, flooring, windows, and disaster repairs.
According to the Demographic Change and the Remodeling Outlook report, released by Harvard's Joint Center for Housing Studies - JCHS, homeowner spending on remodeling projects is expected to see steady growth through 2025, dominated by a large baby boom generation that will want to invest in aging in place safely and comfortably.
Up to this point, it all seems like a bed of roses, but it is just a dog that bites its tail. The same report states that increasing house prices are encouraging homeowners to reinvest in their homes, contributing to a decrease in housing affordability, especially among first-time buyers. And climbing mortgage interest rates could leave little allocation to make improvements and repairs.
Cost-Burdened Homeowners Spend Less on Home Improvement
A household is said to be cost-burdened when it pays more than 30 percent of its income toward housing expenses and severely cost-burdened when it is more than 50 percent.
This data also shows that cost-burdened homeowners only represent 21 percent of total expenses and projects carried out from 2013 to 2015. Unlike affordable housing owners, they spent mostly on room additions and slightly more on disaster repairs, but the rest of the expenses are similarly distributed.
One of the causes could be attributed to the fact that many Gen-Xers are still recovering from home equity losses after the housing crash, and although some projects were carried out, they were more moderate in their spending. Even the expenditure per project was below the national average of $1,200.
Rental Demand, a Double-Edged Sword for the Home Improvement Market
In response to an increase in rental demand, owners have been investing in upgrading their properties to offer them in the rental market. They typically update their dwellings to increase rental fees.Therefore, growth in rental improvement spending has been remarkably strong in several markets where multifamily construction is unable to supply affordable rental units.
According to the latest America's Rental Housing report by JCHS in mid-2015, rental demand was unprecedented with an increase of nearly 9 million from 2005 - the largest gain in any 10-year period on record.
Although it is possible that this trend boosts the need for renovations, the high rents could also make it difficult for prospective buyers to become homeowners of affordable housing.
Conclusion
The data is clear that affordable housing is key to keeping the home improvement industry strong. As long as homeowners do not spend more than 30 percent of their income for housing, they will continue spending on upgrades.
Moreover, the outlook is good according to the JCHS report, which states that older owners will drive most of the growth in home improvement spending, and millennials are expected to take on more remodeling projects over the next decade. The high cost of housing in coastal markets will encourage many younger households to look for more affordable homes to buy, including older homes requiring renovations.
However, the increase in rentals will continue because it is driven by demographic factors and a persistent gap in new housing production since the 2008 housing crisis. Therefore, to keep the home improvement market robust, we should aim to put a break to the affordable housing crisis by offering a broad range of housing options.
Sources: American Housing Survey Demographic Change and the Remodeling Outlook America's Rental Housing report
For the purpose of this post, we use the definition of affordable housing from the U.S. Department of Housing and Urban Development, which is housing that the occupant(s) is/are paying no more than 30 percent of their income for gross housing costs.