industry update - foundation finance · , jchs research note, april 2016. forecast estimated using...

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Industry Update

Kermit BakerRemodeling Futures ConferenceJoint Center for Housing Studies

October 25, 2016

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Home Improvement & Repair Spending Estimated to Have Matched Its All-Time High Last Year

National home improvement and repair market size estimates

$331.4 $318.4 $310.4

$276.9 $274.9 $283.8 $285.5 $304.1

$320.6 $335.2

$355.4

14.8%

-3.9% -2.5%

-10.8%

-0.8%

3.2%

0.6%

6.5% 5.4% 4.6% 6.0%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

$0

$50

$100

$150

$200

$250

$300

$350

$400

2006 2007 2008 2009 2010 2011 2012 2013 2014(p)

2015(p)

2016(f)

Spending (in bil.) Annual % change

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Notes: Non-AHS years (even number years) are estimated using the methodology described in Re-Benchmarking the Leading Indicator of Remodeling Activity, JCHS Research Note, April 2016. Forecast estimated using JCHS Third Quarter 2016 LIRA. (p) – preliminary; (f) – forecast. Sources: JCHS calculations using HUD, American Housing Surveys; Department of Commerce, Retail Sales of Building Materials; US Census Bureau, C-50 and C-30 series; and JCHS Research Notes N10-2 and N16-4.

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Most Economic Indicators Point to a Healthy Home Improvement Industry

RecentPast Peak

RecentTrough 2015 Current

Remodeling IndustryTotal remodeling spending (billions) $331.4 $274.9 $335.2 $355.4Rental remodeling spending (billions) $57.0 $49.7 $62.4 $64.0Remodeling permits (ann. chg. in # of properties) 12.9% -10.6% 9.8% 9.4%Existing single-family home sales (millions) 6.3 3.1 4.8 4.7National house prices (index: Jan. 2000=100) 193.7 128.8 173.4 182.8Remodeling contractor employment (thousands) 318.7 229.5 306.6 313.8Unemployment rate – construction industry 6.7% 20.6% 7.3% 5.2%Retail sales – building materials (billions) $299.4 $225.7 $288.0 $302.4

ConsumerConsumer confidence (index: 1985=100) 111.9 25.3 96.3 104.1Household income (median, 2012$) $57,400 $52,700 $56,500 $57,200

FinancialPrime lending rate 8.25% 3.25% 3.37% 3.50%30-year fixed-rate mortgage, Freddie Mac 6.76% 3.34% 3.96% 3.46%Cash out mortgage refinancing activity (billions) $320.5 $27.1 $43.6 $46.5

Note: Current household income estimated using Employment Cost Index growth.Sources: JCHS, NAR, CoreLogic, USDOL, US Census Bureau, Conference Board, FRB, Freddie Mac, BuildFax.

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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Significant Decline in Ownership Rates Over the Past Two Decades, but Greatest Proportionally for Younger Households

65.4%

39.3%

65.5%

75.5%80.0% 78.9%

68.7%

42.4%

68.9%

76.3%81.0% 80.6%

62.9%

34.1%

58.3%

69.1%74.7%

77.9%

0%

20%

40%

60%

80%

100%

all households Under 35 35 to 44 45 to 54 55 to 64 65 or older

1996 2006 current

National homeownership rates by age

Source: U.S. Census Bureau, 2nd quarter of each year.

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Reasons for Low Ownership Rates for Younger Households

• Housing Preferences– Flexibility of renting– Lower rates of auto ownership, requiring alternative transportation

options; – Proximity to work/commercial/social activities– Financial risks of ownership

• Economics/Demographics– High student loan debt– Low incomes/uncertainty of “gig” economy– Tighter underwriting standards for mortgages– Delayed household formations/marriage/childbirth

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Peak Millennials

Low ownership rates for younger households has resulted from the intersection of three independent cycles that are simultaneously winding down:

• Growing cohort of younger households - 1990 peak birth year;

• Weakness in job market/incomes – 2009 peak year for unemployment, but elevated rates linger;

• Stalled housing market (starts, home sales, inventory) has delayed traditional housing progress.

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Source: Dowell Myers, “Peak Millennials: Three Reinforcing Cycles That Amplify the Rise and Fall of Urban Concentration by Millennials”, Housing Policy Debate, May 31, 2016.

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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Prolonged Down Cycle for Interest Rates Likely Ending

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0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

10-Year Treasury Note

3-Month Treasury Bills

Short-term and long-term interest rates (percent)

Source: Federal Reserve Board, accessed through Haver Analytics.

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In Recent Years, Cash Out Refinancing Has Provided Unexpected Boost to Home Improvement Spending

$0

$50

$100

$150

$200

$250

$300

$350

10

Notes: Calculated as a four-quarter trailing sum.Source: Federal Home Loan Mortgage Corporation, http://www.freddiemac.com/finance/refinance_report.html.

Mortgage refinance – total home equity cashed out (annual rolling totals, billions of $)

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Rising Interest Rates and Home Improvement Spending

• As long-term rates rise, cash-out refinancing will stall;

• Seeking to hold onto historically low mortgages, owners looking to finance home improvement projects likely will rely on short-term equity loans;

• Short-term rates much more volatile, increasing risk and potentially reducing demand from owners looking to finance projects;

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While Millennials are Carrying the Most Student Loan Debt, Gen-Xers Have the Highest Overall Debt Levels

$58.4$52.6

$88.6

$54.0

$27.2

$0

$20

$40

$60

$80

$100

All HH's Millennials Gen-X Baby boomers Silent generation

Mortgage Credit card Auto Education Other

Median household debt by generation, ($ thousands), 2014

Source: The Pew Charitable Trusts: “The Complex Story of American Debt – Liabilities in Family Balance Sheets, July, 2015.

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Millennials Carrying About as Much Debt as Gen-Xers at Comparable Ages; Baby Boomers Have Carried Less

$11,300

$26,700

$9,300

$31,500

$118,400

$87,900

$52,900

$75,600

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000Millennials

Gen-Xers

Baby Boomers

Age 22 Age 27 Age 34 Age 40

Year: 2004 1989 2013 1998 2007 1989 2013 1995

Median debt levels by generation

Note: Debt levels for middle wealth-holders, defined as those in the middle three quintiles of the wealth ladder.Source: Source: The Pew Charitable Trusts: “The Complex Story of American Debt – Liabilities in Family Balance Sheets, July, 2015.

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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House Prices Continue to Recover, Having Gained Back Over 80% of Their Losses

120

130

140

150

160

170

180

190

200

210

-33.5% +42.0%

Single-family house price index (Jan. 2000=100)

Source: CoreLogic National House Price Index (HPI), Single family attached and detached structures as of August, 2016. Data accessed on 10/11/16.

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Price-to-Income Ratios Exceed Historical Averages in Many Large Metro Areas

Notes: Index compares the median price of homes to the median level of household income in a given area. For quarters where median income is not available from the Census Bureau, Zillow calculates future quarters of median household income by estimating it using the Bureau of Labor Statistics’ Employment Cost Index.Source: Zillow Price-to-Income Ratio, calculated as part of Zillow’s quarterly Affordability Indices.

Ratio of single-family existing house prices to household income (quarterly) for U.S. and top 15 metro areas ranked by population

16

0

2

4

6

8

10Historic Average (1985-2015)2016:Q2

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Renters in Many Large Metro Areas Face High Likelihood of Housing Cost Burdens

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62.6%58.0% 55.9% 55.7% 55.0% 54.5% 53.5% 53.4% 52.0% 51.9% 51.8% 50.8% 50.5% 50.4% 50.2%

0%

10%

20%

30%

40%

50%

60%

70%

Share of renter households facing housing cost-burdens, 2015

Notes: Housing cost burdens are defined as paying more than 30% of income for housing expenses. Source: JCHS tabulations of 2015 American Community Survey.

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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$5.0

$17.5

$37.5

$0

$10

$20

$30

$40

Matthew (2016) Sandy (2012) Katrina (2005)

Insured property losses for residential and commercial properties (billions)

Note: Figures are the mid-ranges of estimates.Source: CoreLogic.

Hurricanes Can Generate Extensive Localized Need for Improvements and Repairs

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Over Past Two Years, Disaster Spending Averaged 5% of Owner Improvement Activity

Earthquake$0.1 Tornado/hurricane

$1.6

Lightning/fire$2.6

Floods$1.5

Other$5.0

Spending on disaster repairs, 2014-2015 annual averages, billions $

Source: Preliminary 2015 American Housing Survey tabulations provided by HUD.

2014-2015 annual average = $10.8B

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Over Past Two Decades, Spending on Disaster Repair Projects Has Generally Been Trending Up

0%

2%

4%

6%

8%

10%

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Disaster RepairsLinear (Disaster Repairs)

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Source: JCHS tabulations of 1995-2015 HUD American Housing Surveys including preliminary 2015 tabulations provided by HUD.

Share of national home improvement spending for disaster repair projects

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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Larger Remodeling Contractors Have Reported Healthy Revenue Growth Over Past Four Years

7.4%8.4%

4.7%

7.9%

10.2%8.6%

5.6%

3.1%

-3.4%

-9.1%

4.9%3.5%

7.3%

10.6%11.5%

7.5%

-10%

-5%

0%

5%

10%

15%

Median annual rate of change in remodeling revenue of larger-scale contractors

Note: Analysis includes remodelers reporting revenue in two consecutive years and ranking in the top 400 in at least one of those years.Source: JCHS tabulations of Qualified Remodeler publication’s Top 500 Remodelers.

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Average Home Improvement Project Size Climbing Back to Levels of Last Upturn

$0

$15

$30

$45

$60

$75

$90

$105

$120

$0

$5

$10

$15

$20

$25

$30

$35

$40

Full-Service (left axis)

Exterior (left axis)

Design/Build (right axis)

Median average job size (thousands of $)

Source: JCHS tabulations of Qualified Remodeler publication’s Top 500 Remodelers.

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Share of Owners Reporting Home Improvement Projects is Remarkably Stable (if Not Slightly Countercyclical)…

59.5%57.4% 57.1% 57.1%

53.6%55.8%

57.5%56.2%

57.4% 57.6%59.0%

40%

50%

60%

70%

80%

1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

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Source: JCHS tabulations of 1995-2015 HUD American Housing Surveys including preliminary 2015 tabulations provided by HUD.

Percentage of owners reporting one or more home improvement projects (over 2-year period)

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…Suggesting That the Change in Remodeling Spending Largely Driven by Change in Project Sizes

$2,130 $2,230 $2,290$2,490 $2,450

$3,190$3,330

$2,530 $2,520$2,660

$2,890

59.5% 57.4% 57.1%57.1%

53.6%

55.8%57.5% 56.2% 57.4% 57.6% 59.0%

40%

50%

60%

70%

80%

$0

$1,000

$2,000

$3,000

$4,000

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Average per owner spending (2015$)

Share of owners reporting projects

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Source: JCHS tabulations of 1995-2015 HUD American Housing Surveys including preliminary 2015 tabulations provided by HUD.

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Home Improvement Industry Trends and Issues• Homeownership rates for young households remain weak;

• Likely impact of rising interest rates on home improvement spending;

• Pace of rent and house price growth likely unsustainable, slowing future home improvement spending;

• Disaster repairs as source of home improvement activity;

• Increased project size pushing up spending;

• Outlook for 2017; contractors guardedly optimistic about prospects for coming year.

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Increase 10% or +18%

Increase 5%-10%29%

About the same(+/- 5%)

33%

Decline >5%9%

Remodelers Estimate Revenue Growth of Around 3.5% This Year…

Estimated growth in company revenue in 2016 (percent of firms by projected change)

Notes: N=204. Estimates are weighted average of responses in the categories.Source: JCHS Contractor Survey, The Farnsworth Group, October 2016.

Average 2016 estimated growth = 3.4%

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… And Projected to Grow Only Modestly Next Year

Increase 10% or +20%

Increase 5%-10%42%

About the same(+/- 5%)

28%

Decline >5%9%

Projected growth in company revenue in 2017 (percent of firms by projected change)

Notes: N=204. Estimates are weighted average of responses in the categories.Source: JCHS Contractor Survey, The Farnsworth Group, October 2016.

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Average 2017 projected growth = 5.3%

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Remodelers Report Growth Coming From Households in Their Traditional High Spending Years

26.0%

41.7%

29.4%23.0%

6.4%

14.2%

21.1%

12.3%

0%

10%

20%

30%

40%

50%

60%

Under 35 35 to 54 55 to 64 65 and Over

Up a littleUp a lot

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Q: Think about the age of your clients. How has the revenue by each age group below changed over the last few years? % of remodelers seeing more revenue by age group

Notes: N=204. Source: JCHS Contractor Survey, The Farnsworth Group, October 2016.

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Aging in Place Retrofits Leading Specialty Home Improvement Niche at Present

41.2%

33.8%

28.4% 28.4%24.5% 22.5% 21.6% 20.6%

17.2%

0%

10%

20%

30%

40%

50%

Aging-in-place

Energyefficiency

Homeautomation

Outdoorliving

Multi-generational

housing

Healthyhome

Recycledmaterials

Sustainability Homesecurity

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Q: Please indicate whether you are seeing more, about the same, or less revenue recently from each of these areas: % of all remodelers seeing more revenue

Notes: N=204. Source: JCHS Contractor Survey, The Farnsworth Group, October 2016.

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LIRA Projects Remodeling Spending Growth to Peak in 2017

246.0 249.6256.8 262.9 269.3 272.7 277.2 281.3 285.0 285.5 291.0 297.2 303.7 304.9

313.0322.1 326.55.1%

6.3%

8.1%8.8%

9.5% 9.3%8.0%

7.0%5.8%

4.7% 5.0%5.7%

6.6% 6.8%7.6%

8.3%7.5%

-5%

0%

5%

10%

15%

$225

$250

$275

$300

$325

$350

$375

$400

$425

Historical Estimates LIRA Projections

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Homeowner Improvements & RepairsFour-Quarter Moving TotalsBillions

Four-Quarter Moving Rate of Change

Notes: The former LIRA modeled homeowner improvements activity only. Historical estimates are produced using the LIRA model until AHS data become available.Source: Joint Center for Housing Studies.

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• Remodeling market fundamentals look solid;

• Younger households having difficulty making housing progress;

• Interest rate cycle likely to reverse, limiting accessibility to owner equity;

• Rising house prices and rent growth likely unsustainable, limiting willingness of owners/investors to continue to fund improvements;

• Disaster repairs growing segment of market;

• Market growth driven principally by project size;

• Remodelers expect another year of modest growth in 2017.

Summing Up

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