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Housing Indicators Arrange Room For Some Remodeling

The stars have aligned in favor of a warm economic climate for home remodeling.

An improved jobs picture, rising home values and calls for a pickup in economic growth are among the confidence boosters experts see driving bright prospects for remodeling spending this year.

"The macroeconomic environment is positive for remodeling," said Celia Chen, a senior director covering the housing industry for Moody's Analytics.

"Job growth is accelerating, and that means more households will have the means to do a remodel," Chen told IBD via by email. "Mortgage rates are low, even though they have increased, and rising home values will also give more households the means to spend on remodeling.

Tight inventories of "desirable" homes for sale, she adds, may also cause some homeowners to decide to stay put and improve the homes they live in rather than move to another house.

Coming Up With The Money

Chen expects job gains to run at an average of 250,000 per month in this year's second half compared with 200,000 per month in 2013 and the first quarter of 2014.

She sees real gross domestic product growth rising to 2.6% in 2014 vs. 1.9% in 2013.

Rising home values constitute a key driver of remodeling spending.

So much so that Frank Blake, CEO of home improvement retail giant Home Depot (HD), cited rising home prices as a company growth booster, on a May 20 conference call.

"Home price appreciation is one of the important drivers of our business, as homeowners get more comfortable that ... they'll be able to recoup that investment," Blake said.

"That's a big tailwind for us, and we've seen continued home price appreciation even during some softening of other housing indicators.

Strong year-over-year home price growth continued in most metro areas in the first quarter, though with rises smaller than the prior quarter, according to the National Association of Realtors.

The national median price for existing single-family homes was $191,600 in the 2014 first quarter, up 8.6% from a year earlier. That compares with a 10.1% rise in the median price in the fourth quarter.

Median price growth moderated in April, according to a NAR report out May 22. The median existing-home price for all housing types for the month reached $201,700, a 5.2% rise from a year earlier. That was less of the increase seen in the first quarter, according to the NAR's latest data.

"Current price data suggest a trend of slower growth, which bodes well for preserving favorable affordability conditions in much of the country," said NAR chief economist Lawrence Yun in a press release. He forecasts home prices will rise 6.4% from a year earlier this year and 4.2% in 2015.

The continuing home-price rise is a "good sign for remodeling," said Abbe Will, a research analyst for Harvard's Joint Center for Housing Studies. "Homeowners just feel better about investing in their homes when the value is improving. It's hard to justify when prices are declining if it's a discretionary project like for the kitchen or bathroom.

How Homeowners Decide

A survey by Piper Jaffray analyst Peter Keith released April 25 found that homeowners' remodeling decisions are influenced by home price appreciation, he told IBD. Specifically, 53% of those polled said that if their home is increasing in value it raises the likelihood they'll embark on a remodeling project.

"I think it is a key driver," said Keith. "It's not necessarily the rate of appreciation (that's meaningful). It's more the general confidence that homeowners have that home prices are actually increasing.

Another macro driver of remodeling is access to credit, says Chen.

Mortgage rates hit new 2014 lows in a Freddie Mac (FMCC) survey this week. The 30-year fixed-rate loan averaged 4.12%, but that's up from 3.81% a year earlier. Freddie Mac forecasts the 30-year mortgage to rise and end 2014 around 4.6%.

"Although conditions are generally positive, rising mortgage interest rates have made remodeling a little more expensive than last year," said Chen.

Tapping Home Equity

Chen said lending remains tight but has "loosened a little bit, at least for home equity installment loans." At the end of 2013, about 65% of home equity installment loan originations were for households with a 700 plus credit score vs. 71% in the fourth quarter of 2012.

In a survey by Keith out April 11, HELOCs made the biggest jump as a method of payment to fund sizable projects, with 14% of those polled planning to use a HELOC to finance part of large-ticket projects, up from 9% in previous surveys.

"We are not ready to conclude that HELOCs will start to grow in the near future, but as home values have continued to improve and more people again have equity in their homes, it seems more likely that more homeowners will start to utilize HELOCs to fund remodeling projects in the future," Keith wrote. "If this occurs it could be a nice driver to future remodeling spending.

A hefty 63% of respondents who intended to do a big-ticket project planned on using cash savings to pay for some of the costs, says Keith. Some 39% of those polled by Keith planned on using a credit card.

Chen says remodel spending this year is up from last year. After accounting for inflation, investment in residential improvements rose 3% from a year earlier in the 2014 first quarter, she says, citing Bureau of Economic Analysis data.

The latest Leading Indicator of Remodeling Activity, released by Harvard's Joint Center in April, shows the outlook for home remodeling spending as "very strong," says Will. The LIRA shows a 9.4% increase in annual spending on home improvement in 2014 from a year earlier. That would compare with a 4% annual rise in 2013, she adds, citing Census Bureau figures.