[REN #695] Remodeling Costs to Rise

Picture of remodeling house for Real Estate News for Investors Podcast Episode #695

This may be a strong year for the home renovation business, although companies that offer those services are cautiously optimistic. The latest reports on the state of the renovation industry show a majority of those companies expect revenue growth, but they have mixed opinions about the economy. Rising business costs are their biggest concern. Many also feel the economy could begin to deteriorate, which could impact homeowner decisions about remodeling plans.

Remodeling to Grow at Gradual Pace

The National Association of Home Builders says, spending for home renovations will continue to grow at a gradual pace over the next two years. It is anticipating a 1.6% increase in 2019 and a 1.1% increase next year. The Association issued its forecast during the International Builders’ Show in Las Vegas. It says, remodelers also agreed with the forecast.

NAHB Remodelers Chair, Joanne Theunissen, says, consumers spent $172 billion on renovation projects in 2018, and that’s contributing to confidence among remodelers. She says, consumer demand remains high in all parts of the country, but high prices for labor and materials are preventing stronger growth in the industry. (1)

Good to Very Good Outlook for Residential Renovation

The 2019 Houzz State of the Industry offers a similar forecast. The report includes the opinions of architects; interior and building designers; general contractors, remodelers, and builders; design-build firms; building renovation firms; landscape and outdoor specialty firms; and decorating specialty firms. As you can see, the survey spans a wide variety of businesses that participate in the remodeling field.

Most of those companies have a good to very good outlook for the residential renovation industry in 2019. That’s mostly due to fewer home sales and a rising number of homeowners who are staying where they are and renovating. Some companies are neutral about what may or may not happen this year, while a sliver of companies in each of those categories believe we’re in for a rough ride. But that’s only a sliver. Architects appear to be the most pessimistic, but not largely so.

If you exclude architects, the rest expect average revenue growth in the remodeling industry to hit the upper single digits — between 8.2% to 9.4%. That’s lower than the past four years indicating a slowdown, but most companies also expect revenues to rise, overall.

There’s also concern about the economy. Houzz says in its report, “While companies maintain widespread optimism about the demand for their services in 2019, sentiments about national and local economic health in 2019 are neutral at best.” Most believe that the economy is more likely to deteriorate than improve. (2)

Pull-Back in Maintenance & Remodeling

Another report from Buildfax also shows a pull-back in maintenance and remodeling activity. Buildfax issues a Housing Health Report each month, and the January report shows a 6.47% year-over-year decrease in maintenance on existing homes, and a 10.85% year-over-year decrease in remodeling work.

BuildFax CEO, Jonathan Kanarex, says, the decline in housing activity toward the end of last year is spilling over into 2019. But, he says, he’s not surprised “given current economic conditions that include the recent government shutdown, sensitivity to interest rate increases and global market stressors, like ongoing trade negotiations.” He says, “It is yet to be seen if an easing of these external factors will alleviate the housing slowdown.”

To help put this information into perspective, we can look back at a BuildFax report from August of last year. As reported by Housingwire, BuildFax reported a dip in remodeling activity, but also a 30% surge over the previous five years. Kanarek said at the time, “The slight dip in remodeling volume may be an early indicator of a leveling off of the very hot housing construction markets.” (2)

Remodeling Industry Challenges

That seems to be what’s happening now as more Baby Boomers choose to age-in-place, and other homeowners decide it’s more economical to remodel their current homes. But it could also get more expensive to remodel, according to Houzz. Companies in that survey not only expect the labor market to remain tight in 2019 — they expect it will get worse. That will drive labor prices and remodeling projects higher. The cost of materials is also an issue. At least half of the companies surveyed expect those costs to rise 50% to 61% this year, which will get passed on to consumers.

Whether you are a homeowner or investor with remodeling plans, you may want to factor in the possibility of higher costs as we get deeper into the year.

(1) National Association of Home Builders Press Release

(2) Houzz Report

(3) BuildFax Report: Article by HousingWire

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