Following a Period of Growth, Gains in Remodeling Spending are Projected to Dip in 2019

The construction industry has had its fair share of challenges following the 2008 crash. However, in the last 5 years, we have seen a change for the better, with growth and development improving across the board. Unfortunately, the domestic market has taken a hit, with the stagnation of real estate sales, increases in interest rates and a slow in the appreciation of house prices. Though the market continues to grow, the rate of growth has begun to show signs of slowing down, causing concern for industry professionals.

Growth rates as shown in the graphic

The graphic was created using data from the Leading Indicator of Remodeling Activity (LIRA), which focuses on owner-occupied spending, nationally, on repairs and improvements to houses in the short term. The data includes actual spending over the last 9 years, as well as projections for 2019.

To start with, 2010 indicated a home improvement and repair spending of $224.8 Billion. However, by 2011 spending had increased to $232B representing a 3.2% improvement from 2010. 2012 showed the smallest increase, overall, of only 1.2% with a total of $234.8B. But growth rallied in 2013 with a steep jump to the second highest growth in spending of 6.3% at $249.7B.

In 2014 spending slowed with an increase of only 5.9%, leaving total spending at $264.4B and in 2015 spending slowed further, increasing by only 5.1% leaving total spending at $278B.

However, by 2016 spending once again rallied with a leap of 6.2% which was maintained into 2017 creating totals of $295.2B and $313.6B respectively. However, it was 2018 that saw the strongest growth of 7.5% pulling spending up to 336.9%. New projections show spending in 2019 is set to fall again, with an increase of only 5.1% leaving the annual total at $354.2B.

What the figures mean in the housing market

Looking at the numbers, there are two key points of interest, the 2011-2012 low point and the 2018 highpoint in spending on domestic repairs and renovations. When looking at the country as a whole, it is not surprising that 2011-2012 had the lowest increase in renovation spending, as that was pretty much congruent with the economic downturn that was bottoming out in the country at the same time. As the economy started to strengthen, however, so too did home improvement spending. 2013 saw the initial boost of an improving economy, however, by 2018 real disposable income had increased by 0.6% and when disposable income booms, so too does spending, leading to that distinct high point in the spending graph.

Though a drop is predicted for the end of 2019, growth will remain positive. This maintains the upward trajectory for remodeling spending that began in 2009, following the 2008 housing crash. The projected dip may be a result of the stagnating housing market. Initially, increasing income rates and improving housing prices lead to activity in remodeling - increasing sales prices is a common inspiration for remodeling. However, now the market seems to have gone too far, with buyers unable to afford inflated home prices and mortgage rates, leading to a slow in sales and therefore, renovations. In fact, Credit Suisse analysts describe the situation as an air pocket caused by the decrease in remodeling urgency.

Of course the term ‘air pocket’ suggests this is a temporary situation, however, something will need to change in the housing market, if sales are to be revived. Odetta Kushi, senior economist for First American, and Danielle Hale, chief economist for Realtor.com, are in agreement, Millennials may provide the jump-start the housing market needs. Both predict that the coming of age of this segment of the population will mean they are eager to invest in first or even second homes, and given improved income rates, they will be the ones who can afford it.

Keep looking forward

As mentioned, remodeling spending is still projected to increase, if at a slower rate than in previous years. If the Millenials are in fact going to pull the US housing market out of the doldrums, then the construction industry should be prepared and internal improvements also need to be made. For instance, the labor shortage issue still needs to be resolved, to ensure renovations can be completed as demand increases. Perhaps this slow in growth could be utilized to train up new workers so that when the air pocket pops, the construction industry is ready.