Demographic Change and the Remodeling Outlook
Harvard's Joint Center for Housing Studies projects that older homeowners, minority homeowners, and owner households without dependent children will be important drivers of the growth of the remodeling market in coming decades.
Researchers from Harvard’s Joint Center for Housing Studies (JCHS) recently presented findings from a new report on the home remodeling market. The report, “Demographic Change and the Remodeling Outlook,” is part of JCHS’ biennial Improving America’s Housing series and predicts key trends and drivers in the home remodeling market. Home improvements for owner- and renter-occupied housing totaled approximately $360 billion in spending in 2016, representing about 2 percent of gross domestic product, according to the JCHS report.
Two of the report’s authors, Kermit Baker and Abbe Will, hosted a presentation on April 7, 2017, in Cambridge, Massachusetts, to discuss the report’s key findings and their implications for remodeling over the next 8 years. The report defined remodeling as encompassing improvements as well as maintenance and repair. Improvements are grouped into three broad categories: discretionary improvements, such as kitchen and bathroom upgrades; replacements of key building systems; and improvements made to the nonprincipal structure of a property. In 2015, spending on discretionary projects represented approximately one-third of expenditures, whereas spending on necessary replacement projects constituted about one-half of all spending. In 2007, before the recession, both discretionary and replacement-related spending comprised about 40 percent of home remodeling spending, respectively.
Notably, the report found that certain parts of the country are experiencing greater levels of remodeling activity. In 2015, the country’s 25 largest metropolitan areas included in the American Housing Survey accounted for roughly $100 billion in owner-driven home investment, which totaled about 45 percent of total investment across the country. Per-owner spending in these areas is about 15 percent above the national average. Baker noted that although residents of these large metropolitan areas are investing heavily in remodeling, affordability concerns, especially among younger buyers, can potentially limit future spending in these areas. Although median home prices nationally are about three times median household income, median home prices in the top ten metropolitan areas for owner spending are an average of five times the median household income. In these large metropolitan areas with growing remodeling activity, housing affordability and the ability of residents to become homeowners can affect the home remodeling market. For example, in 2015, the share of aggregate home improvement spending by homeowners under age 35 in more affordable markets such as Cincinnati, Detroit, and Kansas City was more than twice that of homeowners in high-cost markets such as San Francisco and Los Angeles.
Key Demographic Trends and Growth Drivers
The JCHS researchers examine demographic data to better predict the key drivers of the remodeling market. The data suggest that older homeowners will continue to contribute significantly to the home remodeling market over the next 10 years. Between 2005 and 2015, the share of spending among owners aged 55 and older increased from 31 percent to 52 percent. As the share of owners over age 55 increases, investments in accessibility improvements and other necessary home modifications to allow for aging in place will help drive increased spending among older Americans. Average owner improvements by those over the age of 55 are expected to increase by 10 percent over the next 10 years, and the number of owners in this cohort will increase by 20 percent over the same period. By 2025, owners over the age of 55 will be responsible for an estimated 56 percent of spending in the owner remodeling market.
Minority homeowners will also play an important role in the growth of the remodeling market over the next decade. JCHS estimates that remodeling spending among minority homeowners will increase by 40 percent, up from $43 billion in 2015 to an estimated $60 billion in 2025. The rate of spending growth of minority homeowners is approximately double the anticipated spending growth of white homeowners. These gains are due to the rising number of minority homeowners, which is expected to increase at a rate five times that of white homeowners. Minorities, however, typically spend less on owner-related improvements than do all owners.
The JCHS report anticipates that another key driver of remodeling growth over the next 10 years will come from households without dependent children. JCHS predicts that the number of households without dependent children will increase in the coming years and that the anticipated spending among this group will be higher than average overall household spending overall.
Among all homeowners, JCHS anticipates that improvements will increase moderately over the next 10 years, with an anticipated average annual growth rate of about 2 percent annually through 2025. This moderate growth rate is less than the 2.5 percent annual growth rate between 1995 and 2015 and is a result of a slowdown in the average spending among owners on home improvements.
The Remodeling Outlook
Along with spending among owners, investments in rental housing are expected to play an important role in remodeling spending over the next 10 years. Buoyed by the strong demand and rising rents for rental housing, property owners are investing in older rental housing. Between 2005 and 2015, 10 million new renter households entered the rental market. From 2010 to 2015, the average per-unit expenditure on rental housing improvements increased by an average of 12 percent annually. Investment in older properties is helping to supply the growing middle-market demand for rental housing in metropolitan areas across the country.
As mentioned above, JCHS anticipates that the baby boom generation will also be a key driver of the remodeling market in the coming years. Fueling this growth will be improvements necessary to allow homeowners to age in place and live safely and comfortably into retirement. As younger homeowners transition into homeownership, the need to update and customize outdated units will be essential, the report notes. These homeowners’ priorities for improvements include increasing energy efficiency and incorporating environmentally sustainable products and materials. JCHS anticipates that younger homeowners will be increasingly likely to embrace home automation products as they become available in the market.