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.

What Can We Learn from Attempts to Reduce the Cost of Affordable Housing?

by Sam LaTronica
Gramlich Fellow

Midwestern CDCs trying to build affordable homes that do not require development subsidies have identified three potentially promising strategies: building smaller homes, utilizing factory-built homes, and creatively designing houses to get more out of them. In a new working paper that grows out my work as an Edward M. Gramlich Fellow in Community and Economic Development I conclude that while each technique presents opportunities for cost savings, each also comes with its own set of challenges.

The fellowship, which is co-sponsored by the Joint Center for Housing Studies and NeighborWorks^® America, also expanded my horizons because for years, my conception of new “affordable housing” had been limited to the standard multifamily properties developed in larger urban areas. This was the type of affordable housing I had seen since moving to the Boston area, as well as working for an affordable advocacy organization in the San Francisco Bay Area prior to attending the Harvard Graduate School of Design.

As a Gramlich Fellow in the summer of 2015, I was exposed to a new region and new approach to affordable housing. The Midwestern CDCs, which were part of NeighborWorks^® America’s national network, often had in-house general contractors and focused on building and selling affordable single-family homes, in both urban and rural areas. Given the dearth of housing subsidies, particularly subsidies for affordable housing in rural areas, these CDCs were trying to find cost-saving construction techniques that would allow them to build affordable housing without development subsidies.

The Rambler, a single-family home constructed by the Southwest Minnesota Housing Partnership. The home is 1,092 square feet on the main floor with another 1,092 square feet of unfinished basement space that can be converted into living space or more bedrooms at a later date. This home was constructed in 2014 with an asking price of $153,900.

Through reading popular literature on home construction, analyzing building trends, conducting interviews with CDC leaders, and visiting new developments in the Midwest, it became clear that CDCs were interested in pursuing three potential cost saving techniques: building smaller homes, using factory-built homes, and creatively designing houses to get more out of them.

Smaller homes are theoretically cheaper to build because they simply require fewer materials and less construction time. Once occupied, these houses not only can be cheaper to heat or cool but also will cost less to maintain. Smaller footprints also make it possible to build these homes on smaller or irregularly shaped lots, which helps expand the options for CDCs.

However, cost savings are not always realized when buildings are smaller. Once land and other development costs are factored in, it is possible that building smaller homes will be only slightly cheaper than building larger homes on the same lot. Moreover, the marginal cost of constructing a few hundred more square feet might allow the CDC to sell the house for more money while still keeping it affordable. Some CDC leaders also worry that producing affordable homes that are much smaller than new market-rate homes would create obvious distinctions between income levels and stigmatize the people living in the new, smaller homes. Finally, while building smaller can be smart for a number of reasons, most people still want bigger homes as evidenced by the fact that average house sizes have been increasing and have recently surpassed pre-recession levels. This suggests that without a shift in the overall market, smaller homes may not be a particularly appealing option for CDCs trying to build affordable housing.

While factory-built construction techniques are not necessarily new, they are new to many CDCs. Many Midwestern CDCs are currently experimenting with (or exploring the possibility of using) both modular homes and homes made from structural insulated panels (SIPs). Factory-built homes have the benefit of being produced mostly indoors and using assembly line techniques, which can significantly reduce onsite construction time and protect against weather delays, theft, vandalism, etc. Moreover, homes built in factory-controlled settings can be tighter and more energy efficient and make more efficient usage of building materials (which should reduce their cost).

Like building smaller, however, the cost savings that are touted in popular literature are harder to realize in practice. If CDCs, architects, contractors, and subcontractors do not have enough experience working with factory-built housing, then the development process can hit major roadblocks that negate the hypothetical cost savings that would result from a shorter construction period and lower production costs. In fact, some CDCs that experimented with these techniques ended up with homes that cost far more than they would have cost using traditional stick-built techniques.

Finally, creatively designing houses can supplement the previous construction types to get the most out of new homes. This can come in many forms. Designing attached accessory dwelling units will add more units to the housing stock and can supplement the primary tenant’s income.  Co-housing development can utilize scale and reduce the per-owner development costs. Open floor plans can make smaller homes more palatable and unfinished buildouts can reduce costs while allowing families to later customize their home to meet their particular needs.

In the end, there is no silver bullet that can be used to build affordable single-family homes without a development subsidy. However, there are many techniques that, when combined, could produce significant cost savings. CDC leaders interested in pursuing these approaches should remember that the benefits of these techniques, as described in popular literature, do not always materialize in practice. Therefore, CDC leaders should learn from others who have already experimented with them. They should also establish strong relationships with architects and contractors who have experience with these techniques, so that they reduce the likelihood of delays that would drive up costs. Hopefully, by persevering and learning from others, the CDCs can increase the production of affordable homes.

Sam LaTronica, who graduated from the Harvard Graduate School of Design in 2016, was a 2015 recipient of the TheEdward M. Gramlich Fellowship in Community and Economic Development, which is co-sponsored by NeighborWorks®America and the Joint Center for Housing Studies.

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.

The Rising Tide of Online Home Services

Grant Farnsworth
The Farnsworth Group

The swell of young homeowners and the rapid evolution of the online home services market could lead to a big wave of growth in this sector over the coming years. But how aware are consumers of the availability of these services, and how is the industry responding to this new wave of offerings?

Guest post by Grant Farnsworth of The Farnsworth Group, a member of the Joint Center Remodeling Futures Steering Committee. The blog is based on a recent presentation to the Remodeling Futures group.

GM investing $500M in Lyft, Google investing in Uber, The Home Depot buying Red Beacon, the launch of Amazon Home Services… these large players know something is in the water when it comes to online services. We appear to be witnessing “Uber-ization” of the home services market.

As the platform matures, important questions are beginning to take shape.

• What exactly are online home services? How is this space being defined?
• Who is using these services?
• Are the users’ needs being met?

Early evidence suggests that while millennials are beginning to latch onto these services, older owners are less engaged, and home improvement contractors generally aren’t viewing these service delivery models either as potential partners or as competition to their current business models.

To gain insights on the use and perceptions of online home services, The Farnsworth Group completed a study that surveyed homeowners who had recently hired a service professional. Also surveyed were remodelers and specialty contractors, to better understand their awareness of – and potential integration with – these service delivery models. For this survey, online home services were defined as “websites or apps that are intended to help homeowners and service professionals with home design, home improvement, and/or home repair and maintenance projects”.

Given their relatively recent introduction, much of the population is largely unaware of these services. Both homeowners and professionals view these platforms to best fit with modest improvement and repair projects in the under $5,000 range. Both groups also indicate similar features that are important to them when working with a service pro or client. However, that is where many similarities end. Results show dramatic differences in the adoption of online home services by younger homeowners, older homeowners, and contractors.

Homeowners who hired a service professional within the last 12 months were asked which of the following services they have ever used, or currently use: Angie’s List, HomeAdvisor, Houzz, Porch, TaskRabbit, Thumbtack, and Pro.com. Homeowners between the ages of 21-34 are much more likely to have consulted these home services, and used them in their selection process. Nearly 75% of those using online home services end up hiring a service professional from one of the services.

Online Service	21-34 N=187	35-49 N=284	50-64 N=291	65+ N=192
Angie’s List	36.4%	31.3%	22.0%	16.1%
Home Advisor	27.3%	20.4%	14.1%	10.9%
Houzz	17.1%	13.4%	6.5%	2.6%
Porch	12.3%	2.8%	1.0%	0.5%
TaskRabbit	12.8%	4.6%	1.0%	0.5%
Thumbtack	10.2%	4.2%	4.8%	1.6%
Pro.com	15.5%	3.2%	1.7%	0.0%

However, when remodelers and the trades were asked what apps and websites they have used or are currently using, they are often not as engaged with online home services as homeowners, and certainly not as engaged as younger homeowners.

Online Service	Remodeler N=473	Specialty Tradesmen N=206
Angie’s List	27.1%	26.7%
Home Advisor	18.2%	22.3%
Houzz	25.2%	9.2%
Porch	8.0%	4.4%
TaskRabbit	3.0%	0.5%
Thumbtack	6.6%	5.8%
Pro.com	2.3%	5.8%

Younger homeowners in the study were also generally more willing to engage home service sites. Over three-quarters of millennials are somewhat to extremely willing to do business online, a figure that drops closer to 50% for boomers.

So what is driving homeowners and professionals alike to utilize these new online home services platforms? Homeowners that have used online service sites use them for a variety of reasons, but three stood out in the survey:

• Getting project estimates/costs
• Information on the home services provider
• Being matched with a home services provider

However “being matched with a service pro” is low on their list of importance when it comes to homeowners hiring a service professional. The majority use “word of mouth” for getting a few contractor names.

Remodelers and trades professionals, on the other hand, use online home service sites to generate leads, get design ideas, and market their company. Unfortunately, these features also do not align with what the survey showed was most important to them:

• Communicating with clients
• Managing projects
• Providing estimates

Getting leads via an online service is of little importance because, like homeowners, nearly all contractors get leads from “word of mouth”.

It is clear that the features of online home service sites do not always align with what’s most important to the users. The gap between what’s important and how online service sites are being used indicates either a lack of understanding as to what the platforms provide, OR a failure for the platform to provide appropriate services.

Regardless of the needs for knowledge, education, and platform development that this study illuminates, young homeowners are extremely likely to utilize these online home services sites. They also perceive these sites to be “more beneficial” and “easier to use” than traditional “offline” methods. In contrast, the professionals we surveyed, while willing to test the waters, do not share as much enthusiasm as younger homeowners.

Those who utilize online service sites may see it pay off given the increasing use and high conversion rates. Millennials are the largest generation in our history, and as such are the generation with the most future buying power. As they continue to enter the homeowner market, awareness and use of online home services seems inevitable. With that will come more informed and educated consumers, which should propel a modest swell in online home services to something much, much more significant.

So home improvement professionals are well advised to grab a surfboard, paddle out, and be prepared, because they may catch a killer wave to ride with the new generation of home buyers.

For the complete study results contact The Farnsworth Group at info@thefarnsworthgroup.com or 317-241-5600 x.301.