U.S. Markets closed

Pent-Up Remodeling Demand

After the winter's chill prompted many dwellers to put remodeling projects on the back burner, home improvement spending is expected to heat up for the spring selling season and stay hot deep into the year.

That's the conclusion of a recently released home improvement survey by Piper Jaffray analyst Peter Keith, which found that rising home prices and pent-up demand from postponed projects are among the reasons why spending on spruce-ups will likely keep growing at a strong rate this year.

The National Association of Homebuilders' (NAHB) Remodeling Market Index, released last month, also portends steady growth in the market amid pent-up demand. And the latest Leading Indicator of Remodeling Activity, by Harvard's Joint Center for Housing Studies, forecasts "solid growth" in the home remodeling market, with double-digit year-over-year gains in the first three quarters and a single-digit rise in the fourth quarter. All in all, contractors should be kept busy with home renovations this year.

Ready To Go

The main driver of the strong growth rate is "delayed fatigue," Peter Keith told IBD.

"People have had projects they've wanted to do for some time and are tired of putting them off," he said. "They feel better about the economy and their income situations, and have confidence that home prices are increasing.

In late March, the survey polled 410 homeowners over age 25 with incomes above $35,000 a year. It found that home improvement should see strong spending trends over the next 12 months.

Keith says that after a slowdown in home improvement spending during the harsh winter months of December through February, the survey found that a lot of homeowners "deferred" projects to April and on through September.

And "zero percent" of respondents planned on canceling delayed projects, he says.

"That suggests a good spring remodel season with spending remaining healthy," Keith said.

Specifically, 29% of respondents said they delayed large remodeling projects as a result of the cold winter. When asked when they expected to complete the delayed projects, 69% said in the next six months.

The survey also found that 50% of respondents plan to spend more on improvement projects in the next 12 months vs. the prior twelve. That was a deceleration from 57% in a poll a year ago. But the median planned spending rose to $1,000 from $700.

Spending of over $500 in plantings and lawn maintenance saw the biggest increases of 15 project types. "We think that's very encouraging for a very strong lawn and garden season," said Keith.

The To-Do List

Painting and flooring remained the two most popular projects, the poll found. Bathroom, deck and patio projects were also popular.

Home improvement retailers Home Depot (HD) and Lowe's (LOW), and flooring retailers Lumber Liquidators (LL) andTile Shop Holdings (TTS), should continue to benefit from the strong spending on these popular projects and on the uptick in home remodeling overall, says Keith.

"Remodeling spending should be increasing steadily over the course of the next two years as opposed to new construction, which was really deferred because of weather," said Stephen Melman, the NAHB's economic services director. "Remodeling goes forward steadily and gets through some of these weather obstacles more easily than new construction because they are smaller jobs that have to be done as opposed to digging a foundation for a new home.

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. Melman calls 2014's projected gain "a good, steady increase.

Why is spending going up? There are a lot of homes built in the 1990s and early 2000s that need renovations. "As the housing stock ages, there's more need for renovations," Melman adds. And the severe winter weather may also be prompting a lot of repair work.

The NAHB Remodeling Market Index for the first quarter slipped to 53 from a historically high 57 the two prior quarters but was above the key break-even point of 50. An index above 50 means that more remodelers call market activity higher vs. the prior quarter than call it lower. "More than half are saying things are getter better than say it's getting worse," said Melman. "That's the best sign. The phone is ringing now for estimates on jobs.

An estimate may be for a job done later in the summer and beyond, he adds, "which bodes well for a continuing workload over the course of the year into next year.

Another remodeling spending gauge is the Leading Indicator of Remodeling Activity (LIRA), a short-term indicator of trends in home improvement spending. It's projecting stronger spending earlier in the year and then "tapering off" at the end of the year, says Abbe Will, a research analyst at the Joint Center.

LIRA shows that annual home improvement spending rose 10.7% from a year ago in the first quarter to $140.5 billion. It projects an annual gain of 13.1% in the second quarter and a 14.5% rise in the third quarter before a lower 9.4% gain in the fourth quarter.

Will says that the 9.4% annual gain is still "strong growth" but not like the second and third quarters.

"The housing recovery has at least temporarily lost some of its momentum," said Eric Belsky, managing director at the Joint Center in a statement releasing the report. "And as a result, remodeling spending is expected to follow suit and see slower growth beginning later this year."