Remodeling work rebounds as Americans hire contractors
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Economist Russell Price decided to get a head start on work he'd been putting off for more than 10 years at his own house as he began to see an improvement in home-renovation data.
"I thought things would be picking up, so I started the process of remodeling what I thought was early," said Price, senior economist at Ameriprise Financial Inc. in Detroit.
In a "telling sign" he's not the only homeowner considering such projects, he said many of the contractors he contacted in April already were too busy to squeeze in additional work this year. That's because more Americans are renovating their homes, and many are choosing to hire outside help instead of doing the projects themselves.
This is shaping up to be a "strong year" for home- improvement spending, according to Mike Englund, chief economist at Action Economics in Boulder, Colo. Seasonally- adjusted annualized expenditures totaled about $136 billion in June and have "bounced back" from a recent trough of almost $105 billion in November 2012, Englund said, citing his own calculations using Census Bureau data.
Forty-three percent of U.S. homeowners surveyed last month by the website RemodelOrMove.com said they will renovate their residences this year, up from 41 percent in February and a five- year average of 33 percent. Among respondents, 74 percent plan to hire a general contractor for some or all of the work, compared with 73 percent in the previous survey.
The results show that activity is "broadening, but it's still more heavily skewed to people who were less impacted by the recession," said Dan Fritschen, the founder of the site, who has been tracking industry data since 2005. That's in part because consumers who hire contractors tend to be wealthier than their do-it-yourself peers, so as their home values improved, "they were able to pull the trigger more quickly on remodeling projects."
The median price of an existing house rose 13.5 percent to $214,200 in June from a year earlier, the biggest year-over-year increase since 2005 and seventh consecutive month that property values advanced more than 10 percent, according to data from the National Association of Realtors.
A continued improvement in home prices "will add valuable equity to homeowners for future remodeling projects," James Metcalf, chief executive officer of USG Corp., said on a July 25 conference call. The Chicago-based manufacturer and distributor of building materials is forecasting low single-digit growth in its repair and remodeling business for the rest of the year as "the residential recovery is intact," he said.
While the share of homeowners hiring general contractors remains high by historic standards — averaging 69 percent during the past five years — it probably will decline "as economic good news gets more widespread," Fritschen said. "Do- it-yourself homeowners are slower to return to remodeling, but every indication is that they will."
Trends in home-improvement projects reflect a broader phenomenon: The economic expansion is maturing at different paces depending on consumers' incomes, Price said. While many wealthy Americans have seen "a significant rebound in home values and investment markets," their lower-income peers "still are waiting for benefits from the recovery to accrue."
This reflects the "frustrating disparity" between increasing asset values and lackluster wages in the U.S., said Jack Ablin, who helps oversee about $66 billion as chief investment officer of BMO Private Bank in Chicago. A broader base of increasing home values, wages and job gains is needed to encourage more homeowners to spend on renovation, he said.
Average earnings for all U.S. private-sector employees rose 1.9 percent in July to a seasonally-adjusted $23.98 an hour from a year ago, the smallest increase since March, according to Labor Department data. Payrolls rose by 162,000 in July, the least in four months.
"I'd like to see an improvement in remodeling activity cut across all segments of the housing sector, if possible," Ablin said. That's why he's among investors who monitor such trends to gauge the strength of economic growth that's been typified as "helping a lot of families but not everybody."
Many consumers have taken advantage of low interest rates to refinance their mortgages for more than they owed and pocket the difference. As a result, "some people are feeling richer and better about the economy" and are willing to take on large- scale projects to catch up on work they put off during the recession, Price said.
U.S. homeowners cashed out $8.1 billion in total home equity in the fourth quarter, up from as low as $5.5 billion in 2011, based on data from Freddie Mac, the U.S.-owned mortgage financier based in McLean, Va. The average fixed rate on a 30-year mortgage — 4.36 percent on Aug. 7 — fell as low as 3.36 percent in December 2012, according to Bankrate.com data.
The improvement in spending is a good sign after an "ugly" second half last year, when consumers didn't know the impact of potential tax increases and spending cuts scheduled to take effect in January, Action Economics' Englund said. Since then, the economy has strengthened, while construction of single-family homes is rebounding, which helps give homeowners more confidence about these projects, he said.
Some parts of the industry, such as swimming pools, took a "big, big hit," particularly between 2008 and 2009, when homeowners deferred more than 30 percent of replacement and remodeling work, according to Manuel Perez de la Mesa, chief executive officer of Pool Corp. In 2012 and into this year, there's a "recovery taking hold where behavior is reverting more to normal," he said on a July 18 conference call.
Shares of the Covington, La.-based company have led the Standard & Poor's 500 Index by 8.6 percentage points since Dec. 31, 2012.
Even so, home renovation needs to extend to lower-income consumers for spending to return to its pre-recession peak of $160 billion, Englund said. Remodeling work among do-it- yourselfers has been constrained as "many homeowners still are behaving as though we're in a recession."
While it could be "a good two years" before these owners "come back en masse," it's encouraging that improvement activity is growing as much as 20 percent each year, Fritschen estimates. In addition, homeowners in his website's survey said they plan to spend an average of $102,000 on their projects, up 8.4 percent from a five-year average of about $94,060.
A leading indicator of remodeling work created by Harvard University's Joint Center for Housing Studies suggests that improvements could accelerate into 2014, driven by "general strengthening in the housing market over the past 18 months," according to a July 30 statement from the Cambridge, Massachusetts-based center.
Projects that economist Price began to plan for in April are making "slow progress," he said. A friend of a friend was willing to do a favor and squeeze in some landscaping work. Meanwhile, Price hopes his new backyard fence, with an estimated wait of eight weeks, will be ready by Labor Day.
The experience has "turned into a much bigger effort than I expected" and given him broader insights about the industry, he said, as other consumers like him finally are unleashing pent-up demand related to discretionary spending on their homes.
"Overall demand is picking up, and while that's slowing me down, I think it's an encouraging sign for the economy."