Remodeling slows in anticipation of upcoming ‘historic boom’

Americans looking to remodel their homes are pulling back, but better days are ahead for the industry.

“Remodeling is slowing down, but a historic boom is coming,” Eric Finnigan, vice president of research and demographics at John Burns Real Estate Consulting, told Yahoo Finance in an interview.

According to Finnigan, there are three factors that are likely to help this industry in the coming years.

First, the home renovation market is expected to have 24 million homes in need of repairs or upgrades to roofs, floors, heating and cooling systems, kitchens, bathrooms, and more.

“[These homes are] is basically going to have a complete facelift,” said Finnigan. A house enters its “first model years” when it is about 20-40 years old.

“We’re seeing a big wave of homes coming in that cohort, [those] kind of like prime rebuilding years,” Finnigan said.

Second, three-quarters of mortgage borrowers are stuck with mortgage rates of 4% or lower, and are likely to stay that way for as long as possible. But those homes also need an upgrade, Finnigan said.

And finally, homeowner equity is at an all-time high, allowing homeowners to pay for renovation projects now or in the future.

Kate and Cameron Reinhart stand in their 1880s Octagon home they renovated during the coronavirus pandemic, in Norwich, eastern Connecticut, U.S., January 14, 2021. Photo taken January 14, 2021. REUTERS/Dan Fastenberg

Home improvement delay

While expectations for future renovations may be high, current market dynamics have pushed these projects aside in recent months.

On Tuesday, Home Depot (HD) warned in its latest earnings report that the company expects demand for home improvement to be “moderate.”

“In the third quarter, we noticed some slowdown in certain products and categories, which was more pronounced in the fourth quarter,” Home Depot CEO Ted Decker told analysts Tuesday at the company’s earnings call.

U.S. comparable store sales fell 0.3% for Home Depot in the fourth quarter, falling short of expectations for a 0.3% profit, according to Bloomberg estimates.

Home renovations, particularly DIY projects, boomed during the pandemic as many Americans were stuck at home trying to deal with the eyesore in their homes. But demand for those DIY projects has been plagued by high inflation and a shift in consumer habits.

“The amount of time people spend in their homes is a direct relationship to how much they’re willing to spend on the home,” Finnigan said.

Data from John Burns Real Estate Consulting showed that Google searches for discretionary home improvement projects are returning to 2019 to 2020 levels.

The number of consumers “wanting” a kitchen or bathroom remodel has fallen since peaking in 2021, while projects such as replacing siding or a roof are seeing steady interest.

Home Improvement Google search interest:

Home improvement Google search interest: “Want” projects vs. “Need” projects. (Source: John Burns Real Estate Consulting)

High inflation has also taken its toll on DIY spending.

Customers have become more price sensitive as essentials such as food and rent have become more expensive. Home Depot said the company sees “more sensitivity” as consumers tighten their spending.

For professionals working in remodeling, customers trade on product quality to stay on budget, with 60% of respondents to a recent survey by John Burns Real Estate Consulting reporting this behavior.

Customers who renovate are becoming more price sensitive

Customers who renovate are becoming more price sensitive. (Source: John Burns Real Estate Consulting)

Still, Finnigan expects project demand to remain robust in the coming years as housing sales slow due to higher rates and an aging housing stock.

“There are fewer ads, fewer homes, fewer homes sold, but… [the] underlying demand for remodeling is higher than it probably has been for a decade,” Finnigan said.

“And it will be higher for longer.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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