Remodeling Activity Signals Market Upturn

Renewed investor interest in foreclosed properties appears to be a main driver of an upturn in remodeling activity that should positively benefit the housing market.

Findings from Bank of America Merrill Lynch Global Research indicate a “small-ticket remodeling pickup” is likely to help lift both near-term and long-term investment.

The recent rally in remodeling activity, which “is likely to persist,” also signals a long-term trend expected to matter as much to housing overall as to certain remodeling related markets that according to analysts are likely to mostly benefit from it.

Data show significant growth.

If historically, renovation spending made up about 25% of total construction expenditures, currently it accounts for about 50% of this market, analysts note. And homeowners who are taking on long-delayed remodeling projects are not the only contributors. Real estate investors engaged in fixing up distressed properties also are helping give a boost to the home improvement sector makeover.

“While the home remodeling market is often overlooked, it is helping to lead the broader housing recovery,” explained Michelle Meyer, senior U.S. economist at B of A Merrill Lynch Global Research and co-author of the report.

A combination of “near-term macro headwinds” and strong underlying trends will sustain spending for years to come and help create “a long-term investment cycle,” she said.

The report identifies home improvement, home furnishings, building materials and appliance makers as the four sectors investors will focus on going forward.

Data show increased renovation spending increases are based on construction expenditures, building material sales and remodeling hiring by homeowners—and demand generated by investors who purchase foreclosed properties.

As a rule, renovation expenditures are both less volatile than new construction spending and harder to track, analysts wrote, but since many projects are undertaken by do-it-yourself homeowners, it is important to take into consideration “retail sales data and industry surveys to gauge activity missed by government sources.”

The report finds industry surveys show demand for distressed housing inventory will remain strong, at least in the near term. More than one-third of distressed properties sold in 2012 went to investors, “who make home improvements to re-sell or rent a property,” analysts wrote.

Furthermore, they note, although homeowners still struggle with debt and restricted access to credit, many have begun to undertake small-scale renovations that were delayed during the recession.