Home Remodeling to Rebound in U.S. as Owner Confidence Improves

Broadway Kitchens and Baths owner Jeff Chinman
Broadway Kitchens and Baths owner Jeff Chinman in his showroom in New York. Photographer: Rebecca McClay/Bloomberg

The U.S. home-improvement industry is poised for a revival this year as property owners who scrimped and saved during the recession spruce up kitchens and bathrooms.

Spending on remodeling probably will rise 9.2 percent to $125.1 billion in the first quarter from $114.6 billion a year earlier, according to Harvard University’s Joint Center for Housing Studies. A 13 percent increase forecast for April through June would be the largest jump in five years, a report by the Cambridge, Massachusetts-based center shows.

Home-improvement retailers are preparing for a spring sales bump as homeowners consider upgrading rather than selling their houses at a discount in a struggling market. Signs of recovery in the economy are encouraging people to spend money on work they may have been putting off for years, said Paul Zuch, president of the National Association of the Remodeling Industry, a trade group based in Des Plaines, Illinois.

“There’s an overwhelming pent-up demand for remodeling,” Zuch said. Capital Improvements, his Allen, Texas-based company, lined up about $800,000 in projects for the first two months of the year, more than its total sales for 2010, he said.

Spending on renovations may increase 3.5 percent annually through 2015, according to the Harvard center, which measures data including hours worked by remodelers and retail sales at building materials stores. The gain follows a decline that started in the third quarter of 2007 and sent spending to a six-year low of $112 billion in 2009.

Replacements, Upgrades

New owners of discounted, foreclosed properties and a tax credit for energy-efficient windows and modifications will help drive remodeling demand, the Harvard center said. The bulk of spending during the next five years will be on replacements and upgrades rather than high-end projects, according to the report.

The Residential Remodeling Index by Asheville, North Carolina-based BuildFax showed demand for remodeling rose 18 percent in December from a year earlier, the property data provider said Feb. 15. The index tracks the number of construction permits issued for home improvements in specific metropolitan regions.

Home Depot and Lowe’s, the largest U.S. home-improvement retailers, said they plan to hire additional seasonal workers during the next few months. Both companies in February reported fourth-quarter profits that exceeded analyst estimates, and Home Depot raised its earnings forecast for the year.

Jeff Chinman, who owns Broadway Kitchens & Baths in Manhattan with his wife, Linda Reiter, said improving employment and consumer confidence are drawing customers back to his stores. Foot traffic in his showrooms is increasing steadily after a recession-long slump, he said.

‘Very Busy Year’

“Obviously the last couple years have been tough,” Chinman said. “In the fall, sales have just started to come back. You can feel the activity. I’m expecting that this will be a very busy year.”

The U.S. unemployment rate fell to 8.9 percent in February, the lowest in almost two years, the Bureau of Labor Statistics reported last week. Retail spending probably will increase 4 percent in 2011, according to the National Retail Federation. Confidence among U.S. consumers is at a three-year high, the Conference Board, a New York-based private research group, said last month.

Homeowners “realize it’s OK to buy again,” Chinman said during an interview in his showroom on Broadway in the Union Square neighborhood. The retailer also has locations in Englewood, New Jersey, and Stamford, Connecticut.

‘Extra Dollars’

Ernest Wilson, a residential subcontractor in New Jersey, said he’ll use some of his tax refund to add a third bedroom to his five-year-old Jersey City home. He plans to spend about $8,000 for new walls and closets, painting and tiling, and will do the work himself.

“It’s the market,” Wilson said while shopping at a Home Depot in Jersey City. “You have to hold onto your home until you get a few extra dollars. Then you can renovate.”

Some property owners are stuck in their homes after falling values left almost a quarter of mortgage holders owing more than their residences are worth, according to CoreLogic Inc. U.S. home prices fell 2.4 percent in December from a year earlier and are down 31 percent from the July 2006 peak, based on the S&P/Case-Shiller index of values in 20 cities.

“Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties,” Mark Fleming, chief economist at Santa Ana, California-based Corelogic, said in a March 8 statement. “Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish.”

Home-Equity Loans

The negative equity may limit remodeling projects as it dries up a source of funding. Americans spent about $63 billion a year from home-equity loans on renovations during the 2000 to 2005 real estate boom, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

“Consumer behavior is saying ‘I’m going to invest in my home again,’ even if they’re not seeing gains in equity,” said Joe Emison, vice president of research and development at BuildFax.

Home Depot, the largest U.S. home-improvement retailer, said on Feb. 22 that earnings per share excluding some items will increase as much as 9.5 percent this year, up from a December forecast of no more than 9 percent. Craig Menear, executive vice president of merchandising, said in an interview Feb. 14 that the company is hiring more than 60,000 temporary workers to handle an expected spring sales surge.

“Our business is stabilizing and can improve, even as the housing market remains under stress,” Frank Blake, chairman and chief executive officer, said Feb. 22 on a conference call with investors.

Smaller Improvements

The average Home Depot purchase jumped 2.6 percent in the fourth quarter, the most in more than four years, though consumers are favoring smaller improvements and are still cautious about spending on major renovations, Blake said.

Lowe’s plans to hire 50,000 seasonal workers this spring, Katie Cody, a spokeswoman for the Mooresville, North Carolina-based company, said in a Feb. 24 e-mail. That’s up from 43,000 a year ago.

Robert Niblock, Lowe’s chairman and chief executive officer, said that while employment is stabilizing, home prices have been slow to recover and consumers are concerned about rising prices of oil and raw materials.

“While uncertainty in the market remains, the economic recovery is continuing,” Niblock said Feb. 23 on a conference call with investors. “And as I’ve said before, we are prepared to operate effectively in a slow-growth environment.”

The driving force behind this year’s spending increases will be baby boomers, the first of whom are reaching 65 and preparing their homes for retirement, said Zuch, of the National Association of the Remodeling Industry.

“They’re looking to age gracefully,” Zuch said. “They need better lighting, less barriers, more things in convenient locations. They still want luxury, but they want value.”

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