Home-Remodeling Spending Heats Up

Investor's Business Daily

The harsh winter weather took some of the bloom off the rose in home remodeling as many home- owners postponed projects until the warmer months.

Now that homeowners have thawed out, industry experts expect remodeling spending to heat up amid prospects for a brighter economy and jobs picture.

This should mean good things for home improvement retailers such as Home Depot (HD) and Lowe's (LOW), both of which are expected to produce consistent double-digit profit gains in coming quarters.

"There are a number of things that bode well for remodeling spending for the rest of the year," said Ken Fears, director of housing, finance and regional economics at the National Association of Realtors.

For one thing, he says, home prices remain solid.

"And we expect them to continue to slowly rise through the end of the year and into 2015, which is going to enable people to get financing for equity loans," Fears added. "For those reasons, as well as very tight inventory, there may be more interest in remodeling in the near term.

Encouraging Signs

Celia Chen, a senior director who covers the housing industry for Moody's Analytics, has a similar take.

"From an economic perspective, I feel pretty good about remodeling over the next year," she said. "Growth in the value of construction put in place slowed a little in the first quarter, but the dollar value is trending upward.

Chen is also encouraged by retail sales at building material and garden supply dealers, which rose 4% from a year earlier in the first quarter, according to U.S. Census Bureau.

The increase was "OK, not terrific. But it was still up," Chen said.

After a slowing in homebuilding and construction activity in the first quarter due partly to harsh weather, activity should grow stronger, she says.

She cites the recent improvement in the job market, which should help the housing market.

Chen expects home sales to be stronger by the year's end, helping boost remodeling spending.

The National Association of Homebuilders' Remodeling Market Index for the second quarter, released Thursday, portends a nice pickup in remodeling spending.

The index rose 3 points from the previous quarter to 56, regaining the momentum built in 2013.

An index above 50 indicates that more remodelers report a rise in market activity compared with the prior quarter.

"The recent improvement in the job market has helped restore remodelers' confidence after a dip in the first quarter that was probably in part weather-related," NAHB Chief Economist David Crowe said in a statement. "As homeowners feel more secure about their economic situation, they become more willing to undertake remodeling projects — especially larger, discretionary projects.

The NAHB sees a 3.8% increase in residential remodeling spending in 2014 vs. the meager 0.6% gain in 2013. It projects a 2.4% rise in 2015.

New construction activity is also set to improve, watchers say, which is another good sign for the remodeling market.

Home sales and construction can have a positive impact on remodeling because many sellers do projects in order to improve the marketability of their homes, and many buyers do remodeling projects after they move in.

Bad weather dampened new construction in the first quarter, says Stephen Melman, the NAHB's economic service director. But the forecast for the third and fourth quarters is much better.

The NAHB forecasts that all types of housing starts, including single family and multifamily, will rise 11.9% to 1.040 million in 2014. If so, it would be the first time starts rose above 1 million in several years, Melman told IBD.

A 10.7% increase in single-family starts is predicted for 2014, followed by a 37.8% gain in 2015 amid an improved job market and pent-up demand.

"We're on the right track in new construction in the second half of 2014, with really good momentum," Melman said.

Home Sales Up

Recent key housing data bode well for remodeling spending. In June, existing-home sales rose 2.6% from the prior month to a seasonally adjusted annual rate of 5.04 million, according to the National Association of Realtors.

Sales are at the highest pace since October 2013, but still 2.3% below the 5.16-million-unit level a year ago.

Housing fundamentals are at least moving in the right direction, says Lawrence Yun, the NAR's chief economist.

"Inventories are at their highest level in over a year, and price gains have slowed to much more welcoming levels in many parts of the country," he said. "This bodes well for rising home sales in the upcoming months as consumers are provided with more choices.

Meanwhile, rising home values constitute a key driver of remodeling spending.

Prices are rising more slowly than a year ago, but a short supply of homes for sale — particularly in the West — is putting upward pressure on prices, Yun says.

The median existing-home price for June was 4.3% above a year ago, according to the NAR. This marked the 28th straight month of an annual gain.

"Home prices are improving and people are realizing that the home is an appreciating asset they need to preserve and invest in," Melman said. "With new products (such as energy-efficient windows) and home prices increasing, people may be more likely to go ahead and pull the trigger on remodeling projects they had in their back pocket for five years.

Not everybody will be in a position to do that. Melman points to data suggesting that educational debt such as college loans are "putting a damper on new construction and remodeling.

He says the majority of the people who have this debt are already in their homes and may want to put off remodeling until they pay off that debt.

In addition, KeyBanc Capital Markets analyst Bradley Thomas said certain housing indicators are "sending mixed signals.

The most important metric for the segment of retail he covers is housing turnover, which consists of new- plus existing-home sales in a month.

After a string of double-digit year-over-year gains in 2012 and 2013, trends started to slow, with seven straight months where seasonally adjusted housing turnover has been negative.

"For retailers like Bed Bath & Beyond (BBBY), Pier 1 Imports (PIR) and La-Z-Boy (LZB), these are metrics that are concerning," Thomas said. "The good news is that comparisons will start to get a little easier in a few months."

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