Five Insights from 25 Years of Remodeling Research
I recently retired as Director of the Remodeling Futures Program at the Joint Center for Housing Studies, a position that I have been extremely fortunate to hold since its inception in late 1995. Over this time, with the support of a gifted research staff at the Center, and in conjunction with a dedicated group of industry professionals, nonprofit and association representatives, and public sector policy researchers that comprise the Steering Committee, the Remodeling Futures Program has significantly furthered its goal of developing a better understanding of the home improvement and repair industry.
As my career studying the remodeling industry winds down, I have been reflecting on where we researchers were when I started this journey, and where we are today. What have we been able to learn about how this important industry functions, and what role does it play in the lives of all households? The following is an attempt to summarize five of the most important research findings from a quarter century of studying the residential remodeling industry.
1. Remodeling is a big industry and is central to adapting homes to evolving household needs.
The Remodeling Futures Program estimates that last year homeowners and rental property owners spent nearly $420 billion for home improvements, maintenance, and repairs. Basically, home improvement projects are the primary mechanism for adapting homes to changing household preferences and needs. As our population growth continues to slow and the average age of our current stock of homes increases, the importance of the remodeling industry in meeting our national housing needs has become even more apparent. With annual levels of new construction now accounting for less than 1.5 percent of our housing stock, a higher proportion of evolving housing needs for aging adults, growing families, single individuals, households with lower-incomes, households that include persons with disabilities, and others must be met through modifications to existing homes. That is a key reason why spending on home improvements and repairs has grown to equal the size of the new residential construction market in recent years.
2. Remodeling plays a critical role in preserving the affordable housing stock, and keeping it safe and yes, affordable.
Given the housing affordability challenges the country is facing, considerable effort and resources have been devoted to programs and policies that can produce housing that is more affordable to a broader share of our population. In reality, most affordable housing is not provided through new construction, but rather through the preservation of older, often more modest homes that need ongoing investment to ensure their safety and longevity.
In fact, much of the spending by households on home improvements and repairs does exactly this. While the popular image of a home improvement project may be an upscale kitchen remodel, a luxury bath addition, or a wing added onto a home, typical projects are far more likely to be “need to do” renovations rather than “want to do” indulgences. Almost half of market spending is for replacements of existing home components or systems (such as roofing, siding, flooring, HVAC, and equipment), while an additional 10 percent of market spending is devoted to repairing homes after natural disasters. However, the responsibility of maintaining the stock of affordable homes often falls on households who can least afford it. Given that the demand for affordable units is not being provided through new construction, preserving existing homes is the only option. Fortunately, investments in repairing and updating a home typically allows owners to build equity in their home, giving them the incentive to continue to maintain their home. This equity could also be a source of financing these improvements, but the overwhelming share of home improvement funding comes from savings rather than borrowing.
3. The industry has gotten more specialized, which has mostly produced positive changes.
The remodeling industry is one of the most fragmented in our economy, with an estimated 800,000 contracting businesses that get most of their revenue from home improvement projects. The full-service general remodeling contractor has long been the industry prototype—the contractor who installs a wide range of improvement projects. This business model ensures a lot of competition, and often turns the industry into a commodity service based largely on price. As a result, remodeling contractors have had little ability to scale their operations, and have higher business failure rates than most other industries.
The industry has evolved over the past several decades, though, with many contractors developing more targeted niches for their operations, such as window or siding replacements, energy-efficiency retrofits, bath refitters, basement finishing, roofing replacements, and disaster repairs, to name just a few. This has allowed contractors to standardize their installation procedures, target their marketing, and more easily scale their operations. And since these specialty contractors are able to focus their businesses, they typically operate more efficiently than their full-service competition. Specialization has also facilitated their ability to control their workloads, and avoid some of the boom and bust cycles that can be extremely harmful to the industry.
4. It’s not a “move up or fix up” choice for most households, it’s typically “move up and fix up.”
After buying a starter home, when household size and income typically begin to grow, many think about more space and nicer surroundings. Some households may decide to move up to a larger place, while others may decide to fix up and add onto their current home. However, those options oversimplify the home improvement process.
Our research finds that households spend more on home improvements immediately before selling or soon after purchasing a home. Sellers typically make home improvements so that their home is more attractive to buyers. Buyers, particularly those moving up to larger and more expensive homes, spend even more to improve or customize the home soon after purchase so that they can enjoy those features for as long as they reside in the home. This is particularly true if the home they purchase is an older home, and one where the prior owner did few improvements in recent years. Recent homebuyers spend about 35 percent more on home improvements than owners who have lived in their homes for more than three years, even after controlling for homeowner age and household incomes. In general, mobility has a positive effect on home improvement spending. When a household buys a home, they often develop a wish list of home improvement projects. However, the longer they remain in the home, the list of desired changes generally shrinks. Owners will continue to undertake necessary replacement projects but are less inclined to take on new discretionary activities.
5. Expenditures on home improvements are remarkably predictable.
Preparing a home for sale, and buying a home, particularly a trade-up home, often triggers a round of home improvement spending. However, there are several other predictors of the timing, type, and level of expenditures on home improvements. The age of the household is one of these predictors. The peak time for home improvement spending is when owners are in the 35 to 54 age range. This may not be the time of peak income earnings, but generally is the period when households are expanding, and feel the need for a change in the use of space in their home. Younger households generally do a lot of projects, but they tend to be smaller and are more likely to be DIY improvements. Older households, who are more likely to have a stable composition, tend to carry out more replacement projects, as well as accessibility modifications that allow them to stay in their homes as they age.
Upper-income households are thought to be the key driver of home improvement spending, and a group that will continue to undertake projects regardless of economic conditions. In reality, lower-income homeowners typically spend a higher share of their income on home improvements because some types of projects are difficult to defer. Upper-income owners do in fact account for a large share of spending on major discretionary projects such as kitchen and bath remodels and room additions, which as a category tends to account for a higher share of activity when the economy is strong, and a lower share when the economy is weak. However, since these discretionary projects typically do not account for the majority of market spending, overall spending levels are fairly stable across the business cycle, and historically much more so than spending on new construction.
Our understanding of home improvement and repair activities has made substantial progress over the past 25 years. However, there is still more to learn, and with the leadership of Director Carlos Martín and Associate Director Abbe Will, and the research assistance of Sophia Wedeen and future Center researchers, the next 25 years will undoubtedly be even more productive.