High-End Remodeling
Leads U.S. Renovation

January 19, 2005 -- America's love affair with home-improvement projects shows few signs of fizzling out.

Homeowners and rental-property owners in the U.S. spent $176 billion and $57 billion, respectively, on remodeling and repair projects in 2003, according to a report to be released today by Harvard University's Joint Center for Housing Studies.

The record $233 billion in total spending on such projects accounted for 40% of all expenditures on residential construction and more than 2% of U.S. economic activity. The organization releases a report every other year tracking home-improvement spending.

The most popular home-improvement projects in 2003 were "high-end" ones, such as a major remodeling of a kitchen (defined as one that costs $10,000 or more) or bathroom ($5,000 or more) or the addition of a room, the report says.

Higher interest rates could prompt homeowners to do even more remodeling, analysts say.

The growth in home-improvement spending isn't climbing nearly as fast as it was a few years ago when mortgage interest rates were falling. During the previous two-year period, which ended in 2001, home-improvement spending rose 18%, and during the latest period ending in 2003, spending rose 10%.

The study attributes the strong growth in 2001 to falling interest rates and the weak stock market, which encouraged people to spend money on their homes rather than invest it. Growth in the latest period was weaker because interest rates started to rise and the stock-market rebound began.

"We don't see much of a risk" that home-improvement spending will drop over the next decade, says Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies.

Sales of new and existing homes are expected to remain strong this year at just under 7.5 million, a slight drop from last year's record of 7.7 million, according to the National Association of Realtors. Moreover, the remodeling and repair sector is expected to grow an average of 3% annually over the next 10 years, spurred by at least 11 million households becoming homeowners during that period.

A rise in interest rates "isn't a concern," Mr. Baker says. Most homeowners pay for remodeling or repairs with credit cards, whose high rates aren't heavily affected by interest-rate increases, and cash rather than by taking out loans. Higher borrowing costs actually may prompt more homeowners to stay in their residences longer, making it more likely they will do work on their homes. "In a perverse sense, that might encourage more remodeling," he says.

Unlike previous generations, baby boomers remain active in the home-remodeling market even as they approach retirement. They are responsible for more than half of all expenditures.

In perhaps a sign of things to come, Generation Xers, born between 1964 and 1975, are spending more on average than baby boomers did when they were in their 30s. Both baby boomers and Gen Xers plunked down an average of $2,200 in 2003.

Homeowners are hiring professional contractors to perform most of the remodeling and repair work, paying them about $101 billion. Homeowners spent $37 billion on do-it-yourself projects. People tend to do fewer jobs themselves after they reach the age of 45, the report says.

Major cities within the Sunbelt states saw the most growth in home-improvement activity in 2003. Previously, most of the activity had been concentrated in the Northeast and Midwest because of the older housing stock, generally higher household incomes and, in some areas, a dearth of land for development.

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