New Report: U.S. Home Improvement Industry Outpaces the Broader Housing Recovery

In the aftermath of the Great Recession, the U.S. home improvement industry has fared much better than the broader housing market, according to our new report. Emerging Trends in the Remodeling Market. While residential construction is many years away from a full recovery, the home improvement industry could post record-level spending in 2015.

A number of factors have contributed to the strengthening remodeling market: following the housing bust, many households that might have traded up to more desirable homes decided instead to improve their current homes; federal and state stimulus programs encouraged energy-efficient upgrades; and many rental property owners, responding to a surge in demand, reinvested in their properties to attract new tenants.

Additionally, with the economy strengthening and house prices recovering, spending on discretionary home improvements (remodels and additions that improve homeowner lifestyles but which can be deferred when economic conditions are uncertain) rose by almost $6 billion between 2011 and 2013, the first increase since 2007.

Improvement spending, however, has not been evenly distributed across the country. Homeowners in the nation’s top 50 remodeling markets accounted for a disproportionately large share—nearly 60 percent—of overall improvement spending. Thanks primarily to their higher incomes and home values, owners in metro areas spent 50 percent more on improvement projects on average than their non-metro counterparts in 2013 (see interactive map).  

The remodeling industry also faces a radically different landscape than before the recession. “After years of declining revenue and high failure rates, the home improvement industry is, to some extent, reinventing itself,” says Kermit Baker, director of our Remodeling Futures Program. “The industry is finding new ways to address emerging growth markets and rebuild its workforce to better serve an evolving customer base.”

Looking ahead, there are several opportunities for further growth in the remodeling industry. The retiring baby boom generation is already boosting demand for accessibility improvements that will enable owners to remain safely in their homes as they age. Additionally, growing environmental awareness holds out promise that sustainable home improvements and energy-efficient upgrades will continue to be among the fastest growing market segments.

Millennials, however, are the key to the remodeling outlook. “The millennials’ increasing presence in the rental market has already helped lift improvement spending in that segment,” says Chris Herbert, managing director of the Joint Center. “It’s only a matter of time before this generation becomes more active in the housing market, supporting stronger growth in home improvement spending for decades to come.”

Download the full report, infographic, and media kit.

Join the Twitter conversation with #HarvardRemodeling 

Interactive Map: Where Can Renters Afford to Own?

by Rocio Sanchez-Moyano
Research Assistant

Homebuyer affordability remains near an all-time high, so where are all the first-time homebuyers? According to indexes that incorporate gross measures of house prices, interest rates, and household incomes, affordability remains at unprecedented levels. The National Association of Realtors® index, for instance, shows that the median-income household can afford to buy a home in all but 7 percent of the largest metros. Given that affordability looks good on paper, the lack of first-time homebuyers in all metros has been surprising. In 2013, first-time homebuyers made up 38 percent of home purchases, below the historical average of 40 percent, dating back to 1981. The most recent American Housing Survey shows that 3.3 million households were first-time buyers in 2009-2011, a 22 percent drop from the 2001 survey, which covered 1999-2001. This decline in first-time buyers comes in spite of real mortgage payments for the median home that remain below $800 (levels unprecedented before the recession) and a 7 percentage point decline in the mortgage payment-to-income ratio since 2001.

Affordability indexes typically use median home prices and median incomes to estimate affordability, but it can be difficult to calculate the number of potential first-time buyers from these indexes, as median incomes differ for renters and owners and across age groups. To better estimate affordability for potential first-time homebuyers, the JCHS looked at how many renters in the age group most likely to be first-time homebuyers (25-34) have enough income to afford the costs of owning in different metro areas. Analysis was performed on the top 100 metros by population for which National Association of Realtors® quarterly median existing single-family home price data was available, resulting in 85 metros included in the final analysis. Affordability in this analysis is defined by the maximum debt-to-income ratio established in the Qualified Mortgage (QM) rule that went into effect in January of this year. The median home is considered affordable in this analysis if mortgage payments, with a 5 percent downpayment (more typical for first-time buyers), property taxes and insurance, and non-housing debt payments make up no more than 43 percent of a household’s income (extended metholodogy).

Historically, the majority of first-time buyers are households aged 25-34. Looking at renters in this age group, most would find the monthly costs of homeownership affordable in many metros across the country. Indeed, in 42 of the 85 metros studied, more than half of renters can afford the monthly costs of homeownership. Nearly 30 percent of the 25-34 year old renters in our sample lived in these affordable metros. Only in six metros, concentrated almost exclusively in California, are renter incomes so low compared to house prices that less than 30 percent of renters aged 25-34 can afford the costs of owning.

Click to launch interactive map

So why, given that so many metros are affordable to potential 25-34 year old first-time buyers, has the first-time buyer share remained low? Many demographic and economic forces are constraining the transition to homeownership for renters in their 20s and 30s. The first is the fundamental mismatch between incomes and prices as shown in this analysis. Even in the metros where the majority of renters 25-34 could afford monthly homeowner costs for the median home, more than one-third of renters in this age group cannot. Real renter income for households aged 25-34 remains at some of its lowest levels in more than a decade. The unemployment rate for this age group peaked above 10 percent in 2010 and stayed above 7 percent throughout 2013. Also, as we indicated in our recent State of the Nation's Housing report, an additional 2.4 million households in their 20s and 30s were living with their parents in 2013 (than if the share living at home had remained at 2007 levels). Aside from covering monthly homeowner costs, unemployment and income stagnation mean that even in the lowest-cost metros in this analysis, many potential buyers cannot afford at least $5,000 for a 5 percent downpayment. Finally, 39 percent of 25-34 year old households have student loan debt and often allocate a larger share of their monthly income to student loan payments than older households. As the economy improves, however, there should be more willingness and ability by these households to become first-time buyers.

Rental Supply is Catching up with Strong Demand, but not for Affordable Units

by Elizabeth La Jeunesse
Research Assistant

The Joint Center’s new State of the Nation’s Housing report summarizes ongoing and emerging trends in U.S. rental markets.  Foremost among these is the strength of demand for rental housing, which continued to soar in 2013 albeit at a slower pace relative to recent years.  Indeed, from 2005 to 2013, the U.S. saw a net increase of around 740,000 renter households per year.  This far exceeds historical renter household growth of around 410,000 per year on average from the 1960s through the 2000s.

With rental demand soaring, supply of multifamily rental units—which house over 60 percent of all renter households—did not keep up.  In 2009, for example, construction began on just 109,000 multifamily units.  According to apartment data from MPF Research, demand exceeded new additions to supply by nearly 200,000 units during 2010, and by 170,000 units in 2011.  Rental markets tightened as a result of this excess demand.  Rents rose, occupancy rates climbed to 95 percent for professionally managed apartments, and rental property values reached new peaks. 

But as of 2012, supply picked up and demand eased, bringing the two closer in line with each other (see Figure 5, from our report below).  Indeed, that year demand for apartments outpaced supply by only 21,000 units.  Last year the two measures came even closer into alignment.  Completions of new, professionally managed apartment units reached 163,000 in 2013, marginally exceeding the increase in the number of occupied units.  In other words, supply and demand lined up fairly evenly. (Click charts to enlarge.)

Relative equilibrium also became evident in a slight easing of rent pressures.  Indeed, growth in rents for professionally managed units lowered to a still-healthy rate of around 3.0 percent on average in 2013, down from 4.0 percent two years earlier.  Growth in net operating income for owners of large apartments moderated to 3.1 percent in 2013, down from between 6 and 11 percent in 2011-12 according to data from the National Council of Real Estate Fiduciaries.  The annual rate of return on rental property investment likewise lowered to a more modest but sustainable 10.4 percent, about the same as in the ten years preceding the housing bubble and bust (1995-2004).

While supply of multifamily units rebounded at the national level, the story is more varied across metro areas.  In over half of the nation’s largest metro areas, the volume of permits for new multifamily units in 2013 remained below last decade’s average.  For example, previously booming metros including Las Vegas, Chicago, Atlanta and Phoenix all saw permitting decline by 25 percent or more compared to levels seen between 2000 and 2009 (see Figure 25, from our report) Yet several metros in Texas, as well as Denver, Seattle, Los Angeles, and Washington D.C. registered growth relative to that boom period.  Demand would need to remain strong in such areas to absorb this future supply.

Not all segments of the market are in balance either.  Demand for units affordable to low-income renters and families far exceeds the supply of available units.  An Urban Institute analysis indicates that in 2012, 11.5 million extremely low income households competed for just 3.3 million affordable, available units.  This suggests a supply gap of 8.2 million units needed to house extremely low-income renter households, up from a gap of 5.2 million units ten years earlier.  Lack of affordable, available housing often requires struggling households to pay excessive shares of their income on housing, reducing the money they have left over to buy other goods and services, such as food and healthcare.

As Daryl Carter, Chairman of the National Multifamily Housing Council, pointed out during the webcast release of our new report, greater attention needs to be focused on the types of units being built to ensure that they meet the affordability and sizing needs of today’s renter households. These include not only low income households, but also an increasing number of families with children, a group who saw particularly steep declines in homeownership rates since the Great Recession.  Panelists on the webcast also emphasized the importance of federal rental assistance measures to address the undersupply of affordable units, as well as steps local communities and developers can take.  These include relaxing zoning rules to allow more residential construction and tying affordable housing plans to development projects at the local government level.

How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

by Rocio Sanchez-Moyano
Research Assistant

With the continued growth of house prices across the country, talk of a housing bubble is beginning to reappear in the headlines. House price-to-income ratios are often used to indicate a bubble, as prices have historically had a relatively stable relationship with incomes (both mean and median).  In the US, nationally, the price-to-income ratio remained relatively stable throughout the 1990s.  It began to increase around 2000 and surpassed its long-run average of 3.65 by 2002 (Figure 1).  The national price-to-income ratio continued to increase in the mid-2000s, reaching a high of 4.63 in 2006 before rapidly declining in 2007 and 2008 and eventually hitting a low of 3.26 in 2011.  The classic bubble shape is clearly visible in this trend.  Recent price gains, viewed in this context, do not seem to indicate the return of a bubble; price-to-income ratios today match their early 1990s rates and still have some room for growth before reaching their long-run average.  (Click chart to enlarge.)

Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.

Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates.

However, despite the seemingly straightforward relationship between house prices and incomes in Figure 1, this indicator can be difficult to interpret.  To start, many data sources are available for measuring prices.  One used frequently is the National Association of Realtors ® (NAR) Single-Family Median Home Price as it is widely available for many metros and provides an actual house price (rather than an index showing change in values) that can be compared to income levels.  The disadvantage to this measure is that NAR house prices also capture changes in the types of units that are being sold over time and so does not reflect how the value of the same home changes.  Repeat sales indices, like the Federal Housing Finance Authority’s (FHFA) Expanded-Data House Price Index, which was used to produce the figures in this post, are designed to take into account changes in the values of homes themselves by tracking sales of the same homes over time.  However, the FHFA index can be more difficult to interpret since, as an index, it does not provide information about current prices.  Price-to-income ratios using this data must peg the index to a starting or ending house price.

Furthermore, identifying bubbles or other price anomalies from price-to-income ratios can be difficult because it is not clear what is an appropriate baseline value of the measure for comparison.  Even in the aggregate US case, where the ratio did not fluctuate more than one percent in either direction for much of the 1990s, the linear trend is not flat and the long run average is above the 1990s levels.  This becomes even murkier when observing trends at the metro level.  Some metros, like Dallas, had stable price-to-income ratios over the last two decades (Figure 2).  Dallas did not experience a significant bubble in the mid-2000s and its long-run average mirrors the linear trend.  In other metros, like Phoenix, the boom-bust period led to significant fluctuations in the price-to-income ratio after having been relatively stable in the 1990s.  If the 1990s levels are to be considered normal for Phoenix, then current price-to-income ratios remain below average and recent growth in prices can be considered a return to normal after an overcorrection.

For other metros, the price-to-income trend is more difficult to interpret.  Ratios in Cleveland are well below their long-run average, but the historical trend has been drifting downwards, so ratios in recent years could be indicating a reset of the ratio in Cleveland to lower levels.  At another end, San Francisco has experienced a wide range of price-to-income ratios in recent history.  Price-to-income ratios boomed in the late 1980s, decreased throughout much of the 1990s, and then surged through the mid-2000s.  Compared to its long-run average, ratios in San Francisco are above historical norms, but, when the historical trend is considered, prices can continue to increase before they appear “too high.”  Finally, if a fundamental relationship exists between prices and incomes, it is unclear why the ratio can vary significantly from metro to metro.  The national average is around 3.6.  In the metros observed here, Cleveland and Dallas both have historic averages below 3.0 while San Francisco’s is double the national average. (Click chart to enlarge.)

Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.

Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates

Given this variation, what can we make of the price-to-income ratio?  On a national level, this ratio does a relatively good job of identifying substantive shifts in the market.  In the aggregate, there appears to be a “normal” price-to-income ratio and prolonged deviation from this trend can signal an underlying shift.  However, on a metro-by-metro level, where it can be difficult to identify an appropriate baseline value, long-run historical context is necessary to interpret point-in-time estimates.  In markets like Dallas and Phoenix, historical trends are consistent enough that it can be useful to compare the current ratio to past ones.  In others, like Cleveland and San Francisco, the price-to-income ratio on its own is not especially helpful since there is no clear way to identify a “normal” price-to-income ratio.

Boston's Housing Challenge: Affordability, Availability

Housing availability in Boston has been a particular passion for outgoing Mayor Thomas Menino, who recently unveiled an ambitious plan to build 30,000 homes in Boston by allowing taller structures with smaller units, selling public land to developers at a discount, and using subsidies to spur development of more affordable housing.  Last week, Joint Center managing director Eric Belsky, who served on the Housing Advisory Panel for the plan, joined other housing experts on the local NPR program Radio Boston, to discuss the mayor's plan and Boston's challenges.

Listen to the Radio Boston conversation online.

The Metropolitan Revolution

by Bruce Katz
Guest Blogger

Next Wednesday, September 25, I will be coming to Harvard to share a message: there is a Metropolitan Revolution underway in this country.

While the national economy continues to suffer the lingering effects of the Great Recession—with nearly 10 million jobs needed to make up the jobs lost during the downturn and keep pace with labor market dynamics and more than 107 million people living in poverty or near poverty—the federal government is mired in partisan gridlock and ideological polarization, leaving local and metropolitan leaders to pick up the slack.

In many ways, this transfer of responsibility is not only a cyclical event but also a structural change, given the harsh realities of the shifting federal budget. With a rapidly aging national population, mandatory federal spending on health care and retirement benefits is projected to rise by $1.6 trillion annually by 2023.  This will inevitably squeeze federal spending on critical investments around education, infrastructure, housing and innovation. The result will be a U.S. governance structure that looks very different in a decade: Washington will do less; local governments and metropolitan networks will do more.

To make it through this fiscal resort, we need to rethink power in America. Metros will lead on policy innovation; the federal government (and even state governments) will follow.

The good news is that smart city and metropolitan leaders aren’t waiting for national solutions to local problems. Across the nation, in metros as diverse as New York, Houston and Denver, Portland and Detroit, Los Angeles and Cleveland, leaders are doing the hard work to grow jobs and make their economies more prosperous: investing in infrastructure, making manufacturing a priority again, linking small businesses to new investors and global markets, giving workers the skills they need to compete.

A new metropolitan playbook defines the Metropolitan Revolution:

First, cities and metros are forming broad based networks to co-design and co-produce solutions. The unique advantage that metropolitan areas have over states and the national government is that they are networks of leaders, rather than hierarchies of government officials. Successful metro-level initiatives incorporate broad input and support—from business and civic leaders, heads of universities and philanthropies, as well as elected officials. 

Second, city and metropolitan leaders are taking the time to understand the starting points of their disparate economies and set distinctive visions based on their analysis. The Great Recession reminded us that metro areas perform different functions in the global economy depending on what they make, the advanced services they provide, what they trade and which cities and metros they trade with. What makes Denver a powerful metropolis on the global stage is different from what propels Detroit; the same for Portland, Pittsburgh and Phoenix. 

Finally, city and metropolitan leaders are “finding their game changers” -- designing, financing and delivering transformative economy-shaping solutions that build on their distinctive assets and advantages. The Applied Science Districts in New York City. State-of-the-art transit in Los Angeles and Denver. A new export strategy in Portland; smart manufacturing initiatives in Northeast Ohio; successful efforts to integrate immigrants in Houston.  Even a burgeoning Innovation District in Detroit.

Cities and metropolitan areas will do more because they can. 

The United States is the world’s quintessential Metropolitan Nation.  All 388 metropolitan areas house 84 percent of the nation’s population and generate 91 percent of the national GDP. The top 100 metropolitan areas in the United States alone sit on only 12 percent of the land mass of the country but house 65 percent of the population, generate 75 percent of the GDP. They also concentrate and congregate disproportionate shares of the assets that the nation needs to compete globally: modern infrastructure, skilled workers, advanced industry firms and advanced research institutions.

The United States also devolves more fiscal responsibilities to cities and metropolitan areas (and their states) than other countries. Despite the attention given federal efforts like No Child Left Behind and Race to the Top, local and state governments already account for over 90% of total government spending. Despite the focus on still unrealized proposals like a National Infrastructure Bank, states and localities already account for over 70 percent of transportation infrastructure spending and are the driving force behind such investments in such asset categories as roads, transit, rail, ports, airports, water and sewer and, of course, urban regeneration and basic municipal services.   

Make no mistake: cities and metropolitan areas (and a mixed group of states) will drive strategic investments in education and infrastructure going forward, and they already are. San Antonio’s recent passage of a ballot initiative—Pre-K for SA and Detroit’s corporate and civic support for the M1Rail along Woodward Corridor—are only the latest examples of communities (broadly defined) stepping up to get stuff done.

Yet it is also likely that cities and metropolitan areas will lead in areas traditionally left to the federal government, like investments in basic and applied science and affordable housing. The recent sequestration of federal funding for such traditional federal responsibilities as the National Institutes of Health and public housing sent a strong signal about how unreliable our national government has become. The response will be growing state and metropolitan support via the ballot box for basic and applied research (e.g., California’s $3 billion Stem Cell Research and Cures Initiative) and growing local and metropolitan innovation on the affordable housing front via inclusionary zoning, public private partnerships and local housing trusts capitalized through real estate transfer taxes.

The bottom line is this: the health of the United States should never be defined by what happens in Washington, D.C. Our metropolitan areas are the engines of our economy, the centers of global trade and investment and the driving forces of national competitiveness and prosperity.  In the coming decade -- in this century -- they will be the vanguard of policy innovation and national progress.

Bruce Katz is a Vice President at the Brookings Institution, co-director of the Metropolitan Policy Program, and the co-author of The Metropolitan Revolution (Brookings Institution Press, 2013).  He will speak at the Harvard Kennedy School on Wednesday, September 25 at 7pm (Belfer Building, 79 JFK Street, Cambridge, MA, Starr Auditorium). The event is free & open to the public.

Cities are Growing but Sprawl Continues

by Dan McCue
Research Manager

The 2010 decennial Census provided new data to look at urban growth patterns over the past decade, enabling us to update our views on the latest trends in suburban sprawl and movement ‘back to the cities’.  Growth in our nation’s largest cities has been of particular interest not just because these areas are home to so many people, but because they are the engines of economic growth that often serve as bellwethers of the overall economic health of a region or even the nation as a whole. As has been reported elsewhere, growth in cities has been positive over the past decade, with the majority of the core cities in the nation’s largest metropolitan areas experiencing household growth.  Indeed, our analysis has found that core cities in 72 of the 100 largest metro areas grew in the 2000s. But at the same time, and in contrast to many headlines, our research also shows that the pace of growth in suburbs and exurbs exceeded that in the central cities in all but five metros. Suburban sprawl was alive and well.

Tracking Urban Growth:  Data and Methodology

Using 2000 and 2010 Census data for the top 100 metros, we analyzed the spatial distribution of household growth over the last decade by looking at changes in core urban cities (defined as large cities with populations over 100,000), suburbs (defined as urbanized parts of metros not in large cities), and exurbs (defined as all remaining non-urban tracts).

Our analysis found that, while household growth in core urban cities did occur, on the whole it was slower and smaller than growth in the suburbs and exurbs (See Figure 1).  Overall, the rate of household growth in the core urban cities of these 100 metros was just 6.4 percent, which was much slower than that of suburbs (10.5 percent), and a fraction of the growth rate of the exurban areas (28.3 percent).  In terms of magnitude, the number of households in the top 100 core urban cities grew by just 1.65 million in 2000-2010 while during the same period suburbs increased by 3.0 million households and exurbs grew by 3.2 million.

Source: JCHS Tabulations of U.S. Census Bureau data

Failure to grow as fast or as much as the suburbs and exurbs over the past decade caused the share of households living in the top 100 metropolitan areas’ core urban cities to drop.  Core urban cities were home to fully 39 percent of all households in 2000, but accounted for only 21 percent of all metropolitan area household growth.  Exurban areas, on the other hand, represented only 17 percent of all metropolitan households in 2000 but 41 percent of total metropolitan household growth in 2000-2010. As a result, the share of households living in urban cities dropped from 39 percent in 2000 to 37 percent in 2010, while the exurban share increased from 17 to 20 percent.  The suburban share remained stable at 43 percent of all households.

Looking individually at the distribution of growth within each of the top 100 metros, we found that even in metros where core urban city household growth rates were high, suburban and exurban growth rates were often higher (click here for Excel spreadsheet).  And in the five metros where core urban cities grew faster than the metropolitan areas as a whole, core city growth rates were only 0.5 percentage point higher than overall metropolitan growth rates.  In contrast, in the remaining majority of metros, core urban growth rates were fully 8.8 percentage points slower than the overall metropolitan growth rates.  As a result, many metros saw their share of households living in core urban cities drop significantly (See Figure 2).

Notes: Data include the 100 largest metro areas, ranked by population in 2010. Cores are cities with populations over 100,000. Suburbs are all urbanized areas outside of cores. Exurbs are the remainder of the metro area. Census data do not include post-enumeration adjustments.  Source: JCHS tabulations of US Census Bureau, Decennial Census.

To summarize our top-level findings, data from Census 2010 gives evidence of a ‘back to the cities’ movement in the form of household growth occurring in the majority of core urban cities of the top 100 metropolitan areas.  However, our analyses so far have also provided much more convincing evidence that suburbs and exurbs continued to drive metropolitan household growth over the past 10 years.  Indeed, even in the fastest growing cities, growth typically was neither as fast nor as large as that occurring in the surrounding suburbs and exurbs.