Home improvement projects decline with sagging economy
— -- After a surge in home renovations during the housing boom, new studies show homeowners are significantly curbing spending on such projects — adding to the unemployment facing construction workers and hurting home improvement businesses.
Spring is typically the big season for home remodeling, but this year's falloff will be felt across many kinds of related businesses, including contractors and architects, home furnishings stores and home designers.
Spending on home improvement projects is expected to decline at an annual rate of 12.1% by the third quarter, according to a report by Harvard University's Joint Center for Housing Studies. Spending isn't expected to pick back up until the economy recovers.
Total sales fell 4.5% to $290.5 billion in 2008, the second consecutive annual decline, according to the Home Improvement Research Institute. With housing markets still weak and consumer spending falling generally, the institute expects home improvement product sales to fall 6.4% more in 2009 to $272 billion.
The drop-off is being blamed on several trends. Fewer homes selling means fewer remodeling jobs. Home-equity lines of credit, which many homeowners used to tap to finance their projects, are harder to get because of the battering that lenders have taken from loan delinquencies.
Tumbling home values have left some owners uncertain about whether sinking money into expensive projects will pay off in higher resale prices.
"A lot of remodeling happens after someone buys an existing home," says Nicolas Retsinas, director of the Harvard Joint Center for Housing Studies. "With the drop-off in home sales, you're seeing a drop-off in remodeling."
A drop-off in home remodeling is having a major economic impact. It's taken a toll on the $306 billion remodeling industry.
The slowdown is hurting the construction industry, with companies laying off employees or partnering with complementary remodeling businesses to stay in business.
Related problems
Businesses related to home furnishings and remodeling are also suffering. Linens 'n Things, a specialty store specializing in home items, filed for bankruptcy last year. Home Depot saw a fiscal fourth-quarter loss of $54 million. And Lowe's fourth-quarter earnings dropped 60%.
In addition, some homeowners are delaying planned remodeling projects because they're worried about the economy and job security.
Jennifer Miller, 42, had gotten estimates of up to $5,000 to repair some sagging floors in her 1945 ranch-style home in a quiet, oak-lined street in Jacksonville.
But instead, she's using the money toward her printing and promotional business.
"We're putting it off with the economy being the way it is. I'm trying to put every dime into keeping the business," Miller says.
Some experts say home renovations won't pick up until banks are more lenient on lending.
"A lot of it is access to equity," says Dan Fritschen, founder of RemodelOrMove.com. "Two years ago, there was that access. People could use equity or knew they could. But now so many are underwater (owe more than their homes are worth). They can't get the equity line, and if they do have cash, they are more reluctant to spend it. People are feeling insecure."
Others say continued tumbling home values will raise more uncertainty about the return on a renovation investment.
"There are concerns because home price appreciation was so swift and so large," says Monica Higgins, founder of Culver City, Calif.-based Renovation Planners.
"The market also had been dominated by flippers," she says, "and that's not the case anymore."
She says home projects such as kitchen and bathroom renovations can still pay off, allowing homeowners to recoup those costs when they sell. The national average cost of a bathroom remodeling is $15,899, according to Hanley Wood. When the home sells, it's worth about $11,857, so sellers recoup about 75% of the cost.