Remodeling Poised for a Sharp Recovery

Remodeling may seem passé as the mortgage market and the economy at large strive to recover from the crisis, but research findings along with insider’s expectations show it is anything but. Far from a stagnant activity it is “poised for growth.”

That is the main finding of the latest report by the Joint Center for Housing Studies at Harvard University--which indicates growth after a double-digit decline that followed the 2007 peak of the U.S. remodeling industry.

If in theory even in times of crisis there appears to be some appreciation of the short- and long-term value of remodeling, research findings indicate that everyone from homeowners, investors, and real estate owned managers are ready to take action in the next few years.

JCHS said remodeling expenditures could increase at an inflation-adjusted 3.5% average annual rate, which is lower than the pace seen during the housing boom, “but sharply recovering from the recent downturn.”

And as the industry starts to “return to a more typical pattern of growth,” its main characteristics will also change.

If in the past remodeling was driven by higher-end markets, going forward, demand in lower-end markets also will generate considerable demand.

In the next five years, “the focus of remodeling spending will shift from upper-end discretionary projects to replacements and systems upgrades.

“A New Decade of Growth for Remodeling,” the sixth and latest report in the center’s Improving America’s Housing series, finds that the severe downturn of the past years that caused the market fundamentals to hit bottom is bound to return to normalcy.

Contributing factors include the number of homes in the housing stock, the age of those homes, and the potential income gains for homeowners who opt to make home improvements, “all point to increases in remodeling spending,” as both the economy and the housing market stabilize.

As to what markets may lead this return to remodeling, analysts say it will start in the most distressed areas that have already shown some signs of overall improvements relative to the recent past.

Other market insiders agree.

Veterans like CEO, Dale McPherson who has over 33 years of mortgage industry experience, mostly in distressed asset management, told this publication he sees remodeling growth this year and beyond.

One driver of that trend, he says, is its incentive-power in distressed property management.
McPherson especially suggests, “revisiting remodeling” instead of thinking of reducing the price “because the property has been on the books for so long,” to servicers managing aging REO portfolios. ”Take a second look on remodeling and raise the price.”

Among others a recent RealtyTrac report found that despite major discounts on REOs and foreclosures up to 32% of the regular price and nonetheless the buyers were not rushing into the market, or potential buyers are investors who are not interested in paying a fair price for these assets.

Instead of enabling investors to repair or remodel these properties and sell them at a much higher price, when managed by lender-servicers remodeling cuts on their losses and in turn enables homeowners to benefit from remodeling margins.

Furthermore, says managing director of the Joint Center, Eric Belsky, if traditionally metropolitan areas with rising house prices, older housing stocks, higher incomes and home values, lead the way, this year will feature deviations from that trend.

At this time “a larger share of upscale remodeling expenditures, such as Boston, San Francisco, and Los Angeles, are well-positioned for an upturn in remodeling activity.”

Kermit Baker, director of the Remodeling Futures Program at the Joint Center, argues that since the housing market crash caused “lower household mobility” that in the coming years will translate into a renewed homeowner focus on “improvements with longer paybacks, particularly energy-efficient retrofits.”

He expects to see a slowing of migration to traditionally fast-growing Sun Belt metro areas, so “at least temporarily, more remodeling spending will remain in older, slower-growing areas in the Rust Belt and in California.”

Ultimately, analysts say, remodeling contractors have a number of growth opportunities generated by underinvestment in distressed properties and the need to upkeep the vast real estate owned inventory, lower mobility because of the crisis that creates incentives to improve living standards, changing migration patterns, and the rise of environmental awareness that is motivating many homeowners to “go green.”