Home Remodeling Expected to Remain Strong and Steady into 2019

by Abbe Will
Associate Project Director,
Remodeling Futures

The robust pace of spending on home renovations and repairs is expected to stay strong over the coming quarters, according to our latest Leading Indicator of Remodeling Activity (LIRA). The LIRA projects that annual growth in homeowner remodeling expenditure will remain above 7 percent throughout the year and into the first quarter of 2019.

Strengthening employment conditions and rising home values are encouraging homeowners to make greater investments in their homes. Upward trends in retail sales of building materials and the growing number of remodeling permits indicate that homeowners are doing more—and larger—improvement projects.

While the overall outlook is positive, one area of concern is the slowing growth in sales of existing homes, since sales traditionally trigger significant renovation spending by both sellers and buyers. Even with this headwind, annual spending on residential improvements and repairs by homeowners is set to exceed $340 billion by early next year.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

Remodeling Market to March Higher in 2018

by Abbe Will
Research Associate

The coming year is expected to be another robust one for residential renovations and repairs with growth accelerating as the year progresses, according to our latest Leading Indicator of Remodeling Activity (LIRA). The LIRA projects that homeowner spending on improvements and repairs will approach $340 billion in 2018, an increase of 7.5 percent from estimated 2017 spending.

Steady gains in the broader economy, and in home sales and prices, are supporting growing demand for home improvements. We expect the remodeling market will also get a boost this year from ongoing restoration efforts in many areas of the country impacted by last year’s record-setting natural disasters.

Despite continuing challenges of low for-sale housing inventories and contractor labor availability, 2018 could post the strongest gains for home remodeling in more than a decade. Annual growth rates have not exceeded 6.8 percent since early 2007, before the Great Recession hit.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

Growing Momentum Expected for Remodeling Spending

by Abbe Will
Research Associate

Accelerating growth in residential improvement and repair expenditures is anticipated through the third quarter of 2018, according to our latest Leading Indicator of Remodeling Activity (LIRA).The LIRA projects that annual gains in home renovation and repair spending will increase from 6.3 percent in the fourth quarter of 2017 to 7.7 percent by the third quarter of next year.

Recent strengthening of the US economy, tight for-sale housing inventories, and healthy home equity gains are all working to boost home improvement activity. Over the coming year, owners are projected to spend in excess of $330 billion on home upgrades and replacements, as well as routine maintenance.

And while it’s too early for our LIRA model to capture the effects of recent hurricanes and other natural disasters experienced around the country, there is certainly potential for even stronger growth in remodeling next year as major reconstruction and repairs get underway in affected regions.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

Steady Gains in Remodeling Activity Moving into 2018

by Abbe Will
Research Associate

Healthy and stable growth in home improvement and repair spending is anticipated for the remainder of the year and into the first half of 2018, according to our latest Leading Indicator of Remodeling Activity (LIRA), released today. The LIRA projects that annual increases in remodeling expenditures will soften somewhat moving forward, but still remain at or above 6.0 percent through the second quarter of 2018.

The remodeling market continues to benefit from a stronger housing market and, in particular, solid gains in house prices, which are encouraging owners to make larger investments in their homes. Yet, weak gains in home sales activity due to tight inventories in many parts of the country is constraining opportunities for more robust remodeling growth given that significant investments often occur around the time of a sale.

Even with some easing this year, the remodeling market is still expected to grow above its long-term average. Over the coming 12 months, national spending on improvements and repairs to the owner-occupied housing stock is projected to reach fully $324 billion.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

New Benchmark Data Modestly Lowers Remodeling Market Size Projections

by Abbe Will
Research Analyst

The Joint Center’s Leading Indicator of Remodeling Activity (LIRA) provides a short-term outlook of national home improvement and repair spending to owner-occupied homes and is benchmarked to national spending estimates from the Department of Housing and Urban Development’s American Housing Survey (AHS). The latest LIRA release projects national spending for home remodeling and repairs will grow to $317 billion in 2017, an increase of 6.7 percent from last year. This LIRA release also updates and revises historical spending levels and growth due to the incorporation of newly released historical benchmark data from the 2015 AHS. Compared to last quarter’s LIRA release, the updated LIRA now shows lower and less cyclical growth in homeowner improvement and repair spending in 2014 and 2015, a somewhat lower market size estimate, and also more modest projections for remodeling market growth in 2017. According to Joint Center tabulations of the AHS, spending in 2014 and 2015 was not quite as robust as the LIRA model predicted, growing 11.3 percent from $250 billion in 2013 to $278 billion in 2015 compared to LIRA estimated growth of 14.3 percent over this time period. As seen in Figure 1, the lower growth in remodeling spending in 2014 and 2015 has implications for the size of the market projected by the LIRA model for 2016 and 2017.

Notes: Data for 2014 and 2015 are based on estimates from the 2015 American Housing Survey. Data since 2016 are modeled by the LIRA. Source: Joint Center for Housing Studies.

Previously, the LIRA estimated a homeowner improvement and repair market size of $305 billion in 2016 and projected spending growing to $326 billion by the third quarter of this year. Now with the replacement of AHS-based benchmark data for previously modeled benchmark estimates, the LIRA model indicates remodeling activity reached $297 billion in 2016 and projects spending will reach $317 billion this year. The implication of slightly slower growth in actual remodeling and repair spending is a reduction in market size projections for 2017 of 2.9 percent or $9.5 billion. Incidentally, the more modest growth projected by the LIRA for 2017 compared to the prior release is not related to the addition of the new historical benchmark data. The LIRA projections revise routinely as the year-over-year trends in the LIRA inputs are updated or revised.

The weighted average of the LIRA inputs produces the LIRA estimates and projections as seen in Figure 2A (for modeling improvements spending trends) and Figure 2B (for modeling maintenance and repair spending trends) compared to the now updated AHS-based benchmark data series for 1994-2015. The improvements LIRA continued to track the reference series very closely in 2014 and 2015. The estimates produced by the improvements LIRA model and the AHS-based benchmark now have a correlation coefficient of 0.84 (p-value of 0.00). And a simple regression of the LIRA output on the benchmark spending series results in an R-squared value of 0.6759, which suggests that upwards of 70% of the variation, or movement, in the improvements spending benchmark can be explained by the LIRA model.

Sources: JCHS calculations using HUD, American Housing Surveys; Department of Commerce, Retail Sales of Building Materials; and US Census Bureau, Construction Spending Value Put in Place (C-30); Leading Indicator of Remodeling Activity.

Similarly, Figure 2B compares the weighted average output of the maintenance and repair LIRA model to its AHS-based reference series. The maintenance LIRA has also tracked its benchmark fairly well since 2013. The maintenance and repair LIRA and its reference series have a correlation coefficient of 0.73 (p-value of 0.00) and a simple regression of the LIRA output on the benchmark results in an R-squared value of 0.5362, which suggests that about 54% of the movement in the home maintenance and repair spending benchmark can be explained by this LIRA model.

Sources: JCHS calculations using HUD, American Housing Surveys; Department of Commerce, Retail Sales of Building Materials; and US Census Bureau, Survey of Residential Alterations and Repairs (C-50); Leading Indicator of Remodeling Activity.

Last spring, the LIRA was re-benchmarked to a measure of home improvement and repair spending based on estimates from HUD’s biennial American Housing Survey, and at that time, historical remodeling and repair data from the AHS was available for 1994–2013. Until the 2015 AHS data became available, the LIRA model was used to estimate historical improvement and repair spending levels since 2013. Once every two years, with new historical AHS data, the LIRA benchmark series will be updated. With the January 2017 release, the LIRA model will be used to estimate historical spending levels since 2015 until the next biennial release of the American Housing Survey allows for actual 2016 and 2017 spending data to replace modeled estimates.

More information and analysis of recent and expected trends in home improvement and repair activity will be forthcoming in the Joint Center for Housing Studies’ latest biennial Improving America’s Housing report to be released on Tuesday, February 28th.

Growth in Remodeling Spending Projected to Peak in 2017

by Abbe Will
Research Analyst

Strong gains in home renovation and repair spending are expected to continue into next year before tapering, according to our latest Leading Indicator of Remodeling Activity (LIRA) released today. The LIRA projects that annual growth in home improvement and repair expenditures will continue to increase, surpassing eight percent by the second quarter of 2017 before moderating somewhat later in the year.

Homeowner remodeling activity continues to be encouraged by rising home values and tightening for-sale inventories in many markets across the country. Yet, a recent slowdown in the expansion of single family homebuilding and existing home sales could pull remodeling growth off its peak by the second half of 2017.

Even as remodeling growth trends back down, levels of spending are expected to reach new highs by the third quarter of next year. At $327 billion annually, the homeowner improvement and repair market will surpass its previous inflation-adjusted peak from 2006.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

NOTE ON LIRA MODEL: As of April 21, 2016, the LIRA has undergone a major re-benchmarking and recalculation in order to better forecast a broader segment of the national residential remodeling market. For more information on this, see our earlier blog post, and read the research note: Re-Benchmarking the Leading Indicator of Remodeling Activity.

Above-Average Gains in Home Renovation and Repair Spending Expected to Continue

Abbe Will
Research Analyst

Over the coming year, homeowner remodeling activity is projected to accelerate, keeping the rate of growth above its long-term trend, according to our latest Leading Indicator of Remodeling Activity. The LIRA anticipates growth in home improvement and repair expenditures will reach 8.0 percent by the start of 2017, well in excess of its 4.9 percent historical average.

A healthier housing market, with rising house prices and increased sales activity, should translate into bigger gains for remodeling this year and next. As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs.

By the middle of next year, the national remodeling market should be very close to a full recovery from its worst downturn on record. Annual spending is set to reach $321 billion by then, which after adjusting for inflation is just shy of the previous peak set in 2006 before the housing crash.

For more information about the LIRA, including how it is calculated, visit the JCHS website.

NOTE ON LIRA MODEL: As of April 21, 2016, the LIRA has undergone a major re-benchmarking and recalculation in order to better forecast a broader segment of the national residential remodeling market. For more information on this, see our earlier blog post, and read the research note: Re-Benchmarking the Leading Indicator of Remodeling Activity.

Robust Remodeling Growth Anticipated by Re-Benchmarked LIRA

Abbe Will
Research Analyst

Strongly accelerating growth in home improvement and repair spending is expected heading into 2017, according to the newly re-benchmarked Leading Indicator of Remodeling Activity (LIRA) released today. The new and improved LIRA projects that home remodeling spending will increase 8.6% by the end of 2016 and then further accelerate to 9.7% by the first quarter of next year.

Ongoing gains in home prices and sales are encouraging more homeowners to pursue larger-scale improvement projects this year compared to last with permitted projects climbing at a good pace. On the strength of these gains, the level of annual spending for remodeling and repairs is expected to reach nearly $325 billion nationally by early next year.

Notes: The former LIRA modeled homeowner improvement activity only, while the re-benchmarked LIRA models home improvement and repair activity. Historical estimates are produced using the LIRA model until American Housing Survey data become available.

Source: Joint Center for Housing Studies.

Our freshly recalibrated indicator now forecasts a broader segment of the national residential remodeling market that includes both improvement and repair activity to the owner-occupied housing stock. With this re-benchmarking, the LIRA now more accurately sizes the remodeling market and continues to anticipate major turning points in the spending cycle.

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Note on the LIRA model: As of April 21, 2016, the LIRA has undergone a major re-benchmarking and recalculation in order to better forecast a broader segment of the national residential remodeling market. For more information on the implications of this change, see our earlier blog post, and read the research note:
N16-4: Re-Benchmarking the Leading Indicator of Remodeling Activity.

Greater Coverage of Flourishing Home Improvement & Repair Market Reflected in Center’s Re-Benchmarked Leading Indicator of Remodeling Activity

Abbe Will
Research Analyst

On Thursday, April 21, the Joint Center will release a newly re-benchmarked leading indicator that projects short-term trends in the broader home improvement and repair market. This re-benchmarking and recalculation of the Center’s Leading Indicator of Remodeling Activity (LIRA*) provides three major enhancements over the former LIRA that the Center has produced since 2007:

• More accurate reflection of the true size of the home remodeling market: The re-benchmarking provided an opportunity to better align the LIRA reference series with a more comprehensive remodeling market size that now includes maintenance and repair spending to owner-occupied homes, in addition to improvement spending—at present a nearly $300 billion market for homeowner spending alone.
• Updated drivers of home improvement and repair activity as industry emerges from the Great Recession: The housing and home improvement markets have gone through possibly the most severe cycles in their recorded histories since the LIRA was first released, necessitating a review of the original LIRA model and inputs for accuracy.
• Better reflection of historical spending patterns by homeowners: A major motivation for this re-benchmarking has been the declining quality and reliability of the LIRA’s former benchmark data series, which has been subject to unusually large revisions to its cyclical trend in recent years (see previous blog post on this topic). 

The regularly scheduled release of the LIRA later this week will also include a Research Note* describing the re-benchmarking motivations and methodology and revisions to the LIRA model inputs in detail. Moving forward, the LIRA will be benchmarked to a measure of home improvement and repair spending based on estimates from the Department of Housing and Urban Development’s biennial American Housing Survey. Including home maintenance and repair activity results in a somewhat less cyclical LIRA than previously, but ultimately the re-benchmarked LIRA still anticipates turning points in the market well (Figure 1).

Notes: The most recent data available from the American Housing Survey is 2013. LIRA data only include historical estimates produced by the model. Regular quarterly LIRA releases will project with a time horizon of four quarters.
Source: Joint Center for Housing Studies

Major enhancements to the LIRA model inputs include measures of house prices and residential remodeling permits that together with traditional inputs, such as retail sales of building materials and home construction and sales, are expected to better predict post-Great Recession market trends for the remodeling industry (Figure 2).

The re-benchmarked LIRA, measured as an annual rate-of-change of its component inputs, provides a short-term outlook of national homeowner improvement and repair activity for the current quarter and subsequent four quarters, and is intended to help identify future turning points in the business cycle of the home remodeling industry. The LIRA is released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University in the third week after each quarter’s closing. The release of the First Quarter 2016 Leading Indicator of Remodeling Activity is set for 9:00 AM ET on Thursday, April 21. 

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*Note - links will be updated Thursday with the release and publication of the research note

Home Remodeling Activity Looking to Gain Steam Through Mid-Year

Abbe Will
Research Analyst

Expenditures for home improvements should see healthy gains in 2016, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects annual spending growth for home improvements will accelerate from 4.3% in the first quarter of 2016 to 7.6% in the third quarter. By then, the level of annual spending in nominal terms is anticipated to surpass the previous peak set in 2006.

2016 is looking to be a stronger year for home renovation activity compared to 2015 thanks to the continued recovery in the owner-occupied housing market. In most markets across the country, rising house prices are bringing more homes to the market and increasing sales, which is a large driver of home improvement activity.

The remodeling market has steadily improved in recent years with homeowners incorporating larger, more discretionary projects into their home improvement priorities. The real test this year will be whether the industry can clear ongoing bottlenecks in labor availability and consumer financing concerns to fully meet this increased demand.  (Click chart to enlarge.)

Notes: (e) – estimated; (p) – projected.  Historical data through the third quarter 2015 reflect significant revisions released by the US Census Bureau on 1-4-16. For more information, see: http://www.census.gov/construction/c30/news.html. The fourth quarter 2015 is calculated using preliminary Census Bureau data and LIRA projections.

Source: Joint Center for Housing Studies of Harvard University. 

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For more information about the LIRA, including how it is calculated, please visit the Joint Center for Housing Studies website.

Remodeling Spending Expected to Accelerate into 2016

by Abbe Will
Research Analyst

After several quarters of slackening growth, home improvement spending is projected to pick-up pace moving into next year, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects annual spending growth for home improvements will accelerate from 2.4% last quarter to 6.8% in the second quarter of 2016.

Home improvement spending continues to benefit from the last years’ upswing in housing market conditions, including new construction, price gains, and sales. Strengthening housing market conditions are encouraging owners to invest in more discretionary home improvements, such as kitchen and bath remodeling and room additions, in addition to the necessary replacements of worn components such as roofing and siding.

Although we expect remodeling activity to strengthen through the first half of 2016, further gains could be tempered. Current slowdowns in shipments of building materials and remodeling contractor employment trends, as well as restrictive consumer lending environments, are lowering remodeler sentiment and could keep spending gains in the mid-single digit range moving forward.

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The Leading Indicator of Remodeling Activity (LIRA) is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters. For more information about the LIRA, including how it is calculated, please visit the LIRA page on the Joint Center’s website. The LIRA is released by the Remodeling Futures Program at the Joint Center for Housing Studies in the third week after each quarter’s closing.

Pick-Up Projected in Home Improvement Activity Moving into 2016

by Abbe Will
Research Analyst

The extended easing of gains in residential improvement spending is expected to change course by early next year, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies. The LIRA projects annual spending growth for home improvements will accelerate to 4.0% by the first quarter of 2016 (Figure 1). 

Notes: (e) – estimated; (p) – projected.  Historical data from the second quarter 2014 onward is estimated using the LIRA. Source: Joint Center for Housing Studies of Harvard University.  

One strong signal of a pick-up in home improvement activity is the recent rise in home sales activity, since recent homebuyers typically spend about a third more on home improvements than non-movers, even after controlling for any age or income differences. In addition, rising home prices across the country mean rising equity, which should encourage improvement spending by homeowners.

The Leading Indicator of Remodeling Activity (LIRA) is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters. For more information about the LIRA, including how it is calculated, please visit the LIRA page on the Joint Center’s website. The LIRA is released by the Remodeling Futures Program at the Joint Center for Housing Studies in the third week after each quarter’s closing.

Slowing Growth in Home Renovations Should Stabilize by Year’s End

by Abbe Will
Research Analyst

The healthy gains in residential remodeling activity estimated for 2014 and the first part of 2015 are expected to decelerate, but then gain a little more traction by the end of the year, according to our latest Leading Indicator of Remodeling Activity (LIRA), released today. The LIRA projects annual spending for home improvements will increase a more modest 2.9% in 2015.

One of the largest contributors to this dampening of remodeling growth in 2015 is the sluggish existing home sales activity last year. Housing turnover typically sparks significant improvement spending as new owners customize their recent purchases to fit their needs and, with sales down last year, remodeling will feel the effects this year.

Moving forward, signs of higher growth in remodeling activity include strengthening retail sales of building materials. Also, rising home equity and still favorable interest rates continue to encourage owners to reinvest in their homes.”

NOTE ON LIRA MODEL:  Beginning with the first quarter 2014 release, long-term interest rates were removed from the LIRA estimation model.  For more information on the reasons for and implications of this change, please read our blog post from April. 

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Growth Slowing in Home Remodeling in 2015 (+ New Remodeling Report January 29)

by Abbe Will
Research Analyst

As the broader housing market continues its sluggish recovery, growth in home improvement spending is also expected to soften throughout the coming year, according to the Joint Center's most recent Leading Indicator of Remodeling Activity (LIRA) released today. The LIRA projects annual growth in home improvement spending will decelerate from 6.3% in the first quarter of 2015 to 1.6% by the third quarter.

Due in part to weakening home sales last year, growth in remodeling spending is expected to deflate somewhat in 2015. Homeownership rates continue to slide as lending remains tight and first-time homebuyers are not yet returning to the market.  

Although contractor sentiment has cooled in recent quarters, it remains favorable overall. House price gains are moderating but still strong and home sales appear to be turning a corner now, all of which bodes well for continued, if more moderate, home improvement gains for 2015.

NOTE ON LIRA MODEL:  Beginning with the first quarter 2014 release, long-term interest rates were removed from the LIRA estimation model.  For more information on the reasons for and implications of this change, please read our blog post from April. 

 NEW REMODELING REPORT 
& LIVE WEBCAST – JANUARY 29

On Thursday, January 29, the Joint Center for Housing Studies will release its latest biennial report on the remodeling industry, Improving America’s Housing: Emerging Trends in the Remodeling Market.  Almost fully recovered from the recent downturn, the report identifies the remodeling industry segments that will support further growth in the years ahead. Please join us for the live webcast release at 12:00 p.m. Eastern.  

For more information, visit
www.jchs.harvard.edu/research/improving-americas-housing

Home Improvement Spending Continues Toward More Moderate Growth

by Abbe Will
Research Analyst

Reflecting the slow pace of recovery in the overall housing market, the home remodeling industry is expected to continue its path of moderating growth, according to the Joint Center's most recent Leading Indicator of Remodeling Activity (LIRA), released today.  The LIRA projects annual growth in home improvement spending to ease to 3.1% through the second quarter of 2015.

Stronger gains in remodeling activity are unlikely given the recent slowdowns we’ve seen in housing starts, sales, and house price gains. While the continued recovery in employment should ultimately keep the market on an upward trajectory,  remodeling is likely to see slower growth rates moving into 2015.  Growth in home remodeling activity continues to hover around its longer-term average of mid-single digit gains. Even though the housing market overall has been lackluster, many areas of the country remain economically healthy and remodeling contractor sentiment remains high.

NOTE ON LIRA MODEL:  An important change was made to the LIRA estimation model beginning with the first quarter 2014 release. With the upheaval in financial markets in recent years, the traditional relationship between interest rates and home improvement spending has significantly deteriorated. As a result, long-term interest rates have been removed from the LIRA estimation model.  For more information on the implications of this change, please read our blog post from April.

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Strong Remodeling Spending to Slow Pace Heading Into 2015

by Abbe Will
Research Analyst

Growth in home improvement activity is expected to peak during the second half of 2014 and then begin to ease heading into next year, according to the Joint Center's latest Leading Indicator of Remodeling Activity (LIRA). Revised estimates from the U.S. Census Bureau show the home improvement market grew 5.6% in 2013.* For 2014, the LIRA projects annual gains in home improvement spending of 9.9% with annual growth slowing to 7.0% in the first quarter of 2015.

With the economy improving slower than expected and home sales struggling to keep up with last year’s pace, the recent strong gains in remodeling spending will likely moderate later this year. Although this presents a challenge for the remodeling industry, the LIRA continues to project significant growth going into 2015 and there continue to be promising signs for remodeling, as contractor sentiment remains positive and house prices continue to rise in most areas of the country.

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

*On July 1, the U.S. Census Bureau released annual revisions to the home improvement spending data to which the LIRA is benchmarked. These revisions, going back to January 2012, significantly restated improvement spending for the second half of 2013 when initial data collection by the Census was impacted by the October 2013 government shutdown. This LIRA release incorporates the newly revised historical data from the Census. For more information about these revisions, please visit: http://www.census.gov/construction/c30/pdf/release.pdf.

NOTE ON LIRA MODEL:  An important change was made to the LIRA estimation model beginning with the first quarter 2014 release. With the upheaval in financial markets in recent years, the traditional relationship between interest rates and home improvement spending has significantly deteriorated. As a result, long-term interest rates have been removed from the LIRA estimation model.  For more information on the implications of this change, please read our blog post from April. 

Favorable Financing Costs Not Impacting Remodeling Activity During Recovery

by Abbe Will
Research Analyst
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Solid growth is expected in the home remodeling market this year, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Joint Center. While annual growth is expected to decelerate some by the fourth quarter due partly to the ongoing sluggishness in home sales, home improvement spending is still expected to grow nine percent in 2014. In the near term, lower rates of household mobility and lean inventory levels of homes on the market seem to be helping the home improvement industry. That coupled with an aging housing stock and deferred expenditures during the recession have owners catching up with delayed remodeling projects this year. Another factor that would normally help boost remodeling spending is low financing costs, but as described below historically low interest rates are not having the same impact on home improvements in current market conditions.

Produced by the Remodeling Futures Program since 2007, the LIRA is a short-term indicator of national trends in home improvement spending. The LIRA is calculated as a weighted average of the annual rates-of-change of its component inputs, which are various economic measures that historically have had strong correlations and leads over remodeling activity. With the release of the First Quarter 2014 LIRA today, a decision was made to change the estimation model by removing the financial market conditions input (as measured by long-term interest rates), because the traditional relationship between interest rates and home improvement spending has significantly deteriorated in recent years. As seen in Figure 1, the impact of this change is slightly lower rates of growth in annual home improvement spending estimated for the past several quarters and substantially higher rates of growth projected for the next three quarters. Under the original LIRA estimation model, homeowner expenditures on remodeling projects are projected to increase about three percent in 2014, while the revised model projects spending will increase nine percent this year.

Note: The revised LIRA model excludes 30-year Treasury bond yields as an input and reweights the remaining inputs proportionally.  Source: Joint Center for Housing Studies of Harvard University.  

Major changes to the LIRA estimation model have not been common. The last significant change occurred in 2008 when the LIRA was re-benchmarked from the Census Bureau’s Residential Improvements and Repairs Statistics (C-50) to the Construction Spending Value Put in Place (C-30). The reason for changing the LIRA model at this time is because since 2008, the severe housing and the mortgage market crash and subsequent Great Recession has caused unprecedented volatility in many of the LIRA inputs including the financing measure represented by 30-year Treasury bond yields. The theory behind including a financing measure in the LIRA model is that under more normal housing and economic environments, large home improvement projects are often financed by homeowners through home equity loans or lines of credit or cash-out refinancing of mortgages, and so the historically low financing costs of recent years would ordinarily encourage significant remodeling activity.  Yet under the current conditions of a stalled housing market and still lukewarm economic environment, homeowners have not been able to take advantage of historically low financing costs because of much reduced levels of equity in their homes since the housing crash, as well as tighter lending practices of banks. For these reasons, the historically low interest rates of the past two years did not have the same influence on remodeling activity as in the past. Since the fall in rates did not result in a jump in spending, the recent rise in rates are also not expected to have as much of a chilling effect on remodeling spending as in the past. 

Indeed, as shown in Figure 2, the relationship between the annual rates of change in home improvement spending and 30-year Treasury bond yields was fairly strong when the LIRA estimation model was last updated in mid-2008 with a correlation coefficient of 0.7 between 2000 and 2007 (remodeling spending and interest rates are inversely correlated so that when interest rates increase spending declines and vice versa). While long-term interest rates are historically quite stable, since the housing and mortgage market crisis interest rate changes became unusually volatile as interest rates fell to historic lows and again as rates move off of these lows. Not only have interest rate movements become much more volatile, but the direction of change no longer correlates well with remodeling spending. When including data from the more recent period that covers the downturn and recovery, the correlation coefficient between remodeling spending and long-term interest rates weakens considerably to 0.2 and in fact there is essentially no correlation between the two series after 2008. If the traditional relationship between financing costs and remodeling activity were still intact, much stronger growth in home improvement spending should have occurred when interest rates fell to historic lows in the aftermath of the housing crash, and now as interest rates return to their longer-term trend remodeling activity would be expected to decline considerably. Yet remodeling spending has seen relatively low and stable growth in the years following the downturn.

Note: The rate of change in Treasury bond yields are plotted inversely and with a four-quarter lead
Source: JCHS tabulations of Census Bureau’s C-30 and Federal Reserve Board 30 Year Treasury Bond Yields.

Given the increased volatility in the C-30 benchmark data series and the LIRA inputs in recent years as the housing and home improvement markets have undergone severe cyclical downturns and sluggish recoveries, there is clearly a need for further testing of the LIRA estimation model moving forward to improve its stability. Each year on July 1st, the Census Bureau releases annual revisions to the C-30 for the prior two years, which provides a good opportunity for re-running LIRA input correlations and testing for further additions or substitutions of input variables that historically correlate well with remodeling spending, have strong leads over spending, and are also relatively stable over time. Any further changes to the LIRA model will be announced with the next quarterly release on July 24, 2014. For more information about the LIRA methodology and frequently asked questions (FAQs), please see the Joint Center for Housing Studies website.

Double Digit Growth in Remodeling Spending Expected Through Mid-Year

by Abbe Will
Research Analyst

The home remodeling market should see strong growth in 2014, according to our latest Leading Indicator of Remodeling Activity (LIRA).  The double-digit gains in annual home improvement spending projected for the first half of the year should moderate some to just under 10 percent by the third quarter.

The ongoing growth that we’ve seen in home prices, housing starts, and existing home sales is also being reflected in home improvement activity. As owners gain more confidence in the housing market, they are likely to undertake home improvements that they have deferred.  However, the strong growth for this cycle may start to ebb a bit beginning around midyear.  By that time, we’ll be approaching the pre-recessionary levels of spending, and with borrowing costs starting to creep back up, growth rates are likely to slow some.  (Click chart to enlarge.)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Home Improvement Upturn Expected to Begin Tapering in 2014

by Abbe Will
Research Analyst

The home remodeling market continues to improve, with strong gains expected for the remainder of 2013 and the beginning of 2014, according to our latest Leading Indicator of Remodeling Activity (LIRA).  While the LIRA continues to project annual improvement spending increasing at a double-digit pace in the near term, a slowdown of this growth can be expected by the middle of 2014.

The soft patch that homebuilding has seen in recent months, coupled with rising financing costs, is expected to be reflected as slower growth in home improvement spending beginning around the middle of next year. However, even with this projected tapering, remodeling activity should remain at healthy levels.

In the near term, homeowner spending on improvements is expected to see its strongest growth since the height of the housing boom.  Existing home sales are still growing at a double-digit pace, and rising house prices are helping homeowners rebuild equity lost during the housing crash. (Click chart to enlarge.)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.

Remodeling Gains Expected to Continue Into 2014

by Abbe Will
Research Analyst

In our July 16 blog, Census Bureau Remodeling Data Revisions Out of Sync with Other Market Indicators, we indicated that there would not be a Leading Indicator of Remodeling Activity (LIRA) this quarter due to unusually volatile revisions to home improvement spending data collected by the U.S. Census Bureau.  On July 18, 2013, however, Census announced corrections to their annual revisions and today we are releasing our LIRA. 

General strengthening in the housing market over the past 18 months is translating into increased spending on home improvements. Remodeling contractors have been reporting improving market conditions for the past four quarters, and are seeing strength in future market indicators.  Spending trends have been on a solid upward slope, with the LIRA projecting continued strengthening of the market through the end of this year and into the first quarter of 2014.

Homeowners are more comfortable investing in their homes right now. Consumer confidence scores are back to pre-recession levels, and since recent homebuyers are traditionally the most active in the home improvement market, the growth in sales of existing homes is providing more opportunities for these improvement projects.

Yet, with housing starts leveling off in the second quarter and financing costs beginning to edge up, we may be seeing the beginning of more measured growth in the residential markets. Given normal timing patterns, this suggests that the pace of growth for home improvement spending should begin to moderate as we move into 2014.

(Click chart to enlarge)

For more information about the LIRA, including how it is calculated, visit the Joint Center website.