Americans Boost Spending On Remodeling

February 3, 2014

Homeowners Doled Out $130 Billion Last Year For Renovations

Americans are spending lavishly again to upgrade their homes, indicating they remain confident about the long-term prospects for the recovery despite recent signs of weakness.

Homeowners spent $130 billion on remodeling projects last year, according to data released Monday by the U.S. Census Bureau.  That was up 3.1% from 2012 and was the largest amount of home-remodeling spending since 2007, the year that the housing downturn began.  Permits for remodeling jobs in the U.S. rose 5.1% last year from 2012, the largest increase since 2010 when the figures began their rebound from a 10-year low, according to permit-tracking company BuildFax.

Rising spending on remodeling is in contrast to recent signs of slowing in new-home construction activity, indicating that a growing number of consumers have decided that upgrading their home might be a better investment than buying a new one.  Other factors at play include the limited inventory of existing homes and rising home values, which have made it easier for homeowners to finance their remodeling projects by borrowing against their equity.

Home-equity lending, which sank to its lowest level of the past 10 years in 2010, jumped 18% last year to $123.4 billion, according to estimates by Moody's Analytics.  That increased lending stems mostly from rising home values, which created more equity for many homeowners and lifted some who previously owed more than their home was worth, into positive territory.  According to real estate data firm CoreLogic, two-thirds of all U.S. homeowners had at least 20% equity in their homes as of last year's third quarter, up from 53.2% two years earlier.

"If home prices are going up and people have more equity in their home, things like remodeling and refurbishment will do well, because it's effectively the way of playing the reinvestment game," said Joseph LaBorgna, chief U.S. economist for Deutsche Bank AG.

The increased remodeling activity comes as thousands of contractors and tradesmen are expected to convene in Las Vegas this week at two trade shows geared to the remodeling and home-building industry, the International Builder Show and the Kitchen and Bath Industry Show.  The combined attendance is expected to exceed 80,000, the highest since 2008.

"From 2010 to 2013 is the difference between night and day," said Gary Drake, chief executive of Drake General Contractor Inc., a Los Angeles remodeling company that says it posted a 30% increase in revenue last year to $4 million.  "The phone is ringing more.  Old clients are calling me.  Architects are offering me work.  I'm actually turning down work now."

The increase in remodeling projects has revved up sales for a variety of home-improvement companies, from retailers such as Lowe's to paint company Sherwin-Williams, and local contractors who install everything from granite countertops to carpeting.

Michael Grosswendt, a builder and renovator of high-end homes in the Los Angeles area, said revenue and staff at his company, All Coast Construction, were nearly halved during the downturn to as low as $10 million and 25 workers.  As the market recovered in 2013, Mr. Grosswendt's revenue climbed to $15 million.  These days he's turning down work while keeping his staff at 25 and spending more time on fewer projects.

Suppliers are cashing in, too.  Masco Corporation, owner of brands including KraftMaid cabinets, Behr paints and Delta fauctes, posted $2.2 billion in sales in the third quarter, up 12% from a year earlier partly on strong sales of windows and cabinets.  Residential remodeling projects typically account for roughly three-quarters of Masco's sales.

Mohawk Industries, a global manufacturer of tile, carpet and flooring, saw U.S. sales of its product lines decline by 30% to 40% during the downturn.  In 2013, Mohawk posted quarterly gains, such as a 12% increase in sales of ceramic tile in the U.S. and a 3% boost in carpet sales, due at least in part to more remodeling.

"Those year-over-year gains for our products for remodeling are the first we have seen in the past six years," said Frank Boykin, Mohawk's chief financial officer.  "This is an indication of the potential pent-up demand in the remodel market."

Source: The Wall Street Journal