From a small northwestern observatory…

The good folks at the Joint Center for Housing Studies at Harvard (a well-respected old college near Boston) maintain, among other things, the Leading Indicator of Remodeling Activity.  Home remodeling is a pretty significant component of our nation’s economy, with about a third of a trillion dollars spent annually fixing up homes.  In recent years, remodeling has grown by 6% to 7% per year, fueling job growth and the bottom lines of many of our leading manufacturers and retailers.

However, remodeling is (and this may come as a surprise to the uninitiated) heavily tied to home purchases.  Lest we forget, most homes bought in America, in fact about 90%, are “used” homes.  Whether bought as an investment (rental property) or for owner-occupancy, the first thing most “used” home buyers do is some remodeling.  This may be as little as repainting some rooms all the way to a major kitchen or bath re-do, or even adding on rooms, re-habbing the heating and air system, or replacing a roof.  As home sales have soared in America in recent years, so have remodeling budgets.

However, tightening interest rates and increasing prices have led many forecasters to project declining home sales.  Indeed, my own research suggests that homeownership rates, having bottomed out at about 63% after the recession, are now approaching a more market-normal rate of about 65%.  Thus, any residual pent-up demand may have already been spent.

So, the folks at Harvard suggest that by the first quarter, 2020, the annualize average rate of growth in remodeling will decline precipitously, to about 2.6%.  Further, on an annulized basis, actual dollars spent on remodeling are projected to plateau in the fourth quarter of this year, with a seasonally adjusted decline in the 1st quarter, 2020.

Graphic courtesty Harvard JCHS

Of course, major components of the remodeling sector actually thrive during downturns.  Homeowners who otherwise might “move up” to a bigger house may spend those move-up dollars remodeling.  Further, houses need to be maintained, and stuff just wears out. Thus, any decline in remodeling spending may not be as severe as home sales downturns.  However, it’s worth noting.