Building material prices have risen 23% over the last year according to production builders, in part due to a surge in remodeling driven by 3 primary conditions:
- Rich homeowners. Home equity per owner hit a record high of $315K, an inflation-adjusted increase of $95,000 over 2019! Inflation-adjusted checking account cash balances per capita have increased by 4X as well.
- Few “trade-up” homes available. Faced with the reality of living in their current homes for longer due to lack of homes for sale, frustrated homeowners are choosing to customize, update, and upgrade.
- Rising mortgage rates. The increase in mortgage rates has effectively “locked in” current homeowners by offering a huge financial incentive to stay in their existing home that has a low mortgage rate, versus moving to a new home with a much higher mortgage rate. 72% of outstanding mortgage borrowers are “locked in” with rates below 4%, creating a powerful incentive to stay in place and remodel.
At 1.6 months of supply, the current inventory of existing homes for sale is at the lowest level in history, severely limiting choices for would-be home buyers. To accommodate demand for additional space and functionality, particularly with today’s surge in work-from-home trends, big remodeling projects have been surging.
Remodelers have never been busier. 48% report doing more projects than one year ago, and 65% report that the projects are larger than one year ago.
Debunking Existing Home Sales as a Predictor of Remodeling Spending
Most Wall Street analysts will tell you existing home sales is the best predictor of remodeling spending. The rationale is that sellers will invest in upgrades like floors and paint before listing to increase their home’s market value, and buyers will upgrade after purchasing. However, our analysis shows this overstates the importance of this indicator, given the approximately six million existing home sales each year compared to the $400 billion remodeling market.
In a low inventory situation, such as today, the relationship has broken down completely. Below we show a statistical measure of the declining importance of existing home sales.
18% of recent new home buyers purchased their home with plans to accommodate an adult child, elderly parent, or other family member / friend.
Shining a light on the 400-billion-dollar question everyone is asking: What will slowing home sales mean for remodeling spending?
We expect existing home sales to decline in 2022, given continued extremely tight inventory and a payment shock from rising mortgage rates. However, even with a decline in existing home sales, we forecast continued growth in remodeling spending, especially on large, professional contractor-intensive projects.
Going forward, longer-term structural factors will drive remodeling demand, assisted by shorter-term cyclical drivers, including:
- Wealth from home equity
- Age of the existing housing stock
- Home price appreciation
- Reduced mobility for the majority of owners who will stay in their home
- Continued spending from remodels currently in progress
Interested in a deeper dive on this topic and our complete building products outlook and spending forecast? Ask us about our Building Products Industry Analysis & Forecast report, available to JBREC clients on April 29.