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More than 60% of spending on home improvement went toward actual improvements, rather than repair and replacement.
Courtesy of Harvard's Joint Centers for Housing Studies
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By Anne Balogh
Wouldn't it be great if you could gaze into a crystal ball and see what's in store for the home improvement market this year and beyond? While it may not be as prescient, "The Changing Structure of the Home Remodeling Industry," a new report from Harvard University's Joint Center for Housing Studies (JCHS), is brimming with statistics that can help remodelers forecast opportunities for business growth. It provides an in-depth analysis of today's remodeling industry, examining important shifts in supply and demand and identifying market segments poised for expansion.
The following are some of the key trends to watch, based on report data and an analysis by members of the team that compiled it:
- More big spenders. "Households spending at least $25,000 on improvements accounted for almost one-third of all remodeling expenditures in 2003," says Nicolas Retsinas, director of JCHS. Households with incomes of $120,000 and up have been responsible for 60 percent of the growth in spending since 1995. The most popular types of projects are high-end improvements, such as major kitchen or bath remodels and room additions (see chart).
- A new generation. From 1995 to 2003, the number of Generation Xers owning homes tripled to 12.4 million, and their total home improvement expenditures jumped more than fivefold to $28 billion. "Gen Xers already rival baby boomers in per-household spending," says Bill Apgar, senior scholar at JCHS. He notes that a healthy segment of this group is at the upper end of the income scale, with the ability to exercise broader purchasing options. "They aren't pinned in by how much they can spend on a remodel. They're bringing good incomes and greater diversity to the market."
- Cultural diversity. That diversity comes from the large share of younger households that are minorities and immigrants, particularly Hispanics. Minority households now account for 35 percent of all first-time buyers and 16 percent of trade-up buyers, and their remodeling expenditures have surged 54 percent since 1995. Meeting the demands of this rapidly growing market segment will require builders and remodelers to overcome language and cultural barriers. "Non-native customers will have more trust in a remodeling contractor who makes the effort to speak their language and shows a degree of cultural sensitivity," Bill says. One strategy he recommends is the use of bilingual contracts.
- Growth in the Sun Belt. Of the top 25 markets for home improvements, the cities enjoying the most growth in 2003 are primarily in the Sun Belt states. The top five: Raleigh, N.C. (up 71.9 percent); Birmingham, Ala., (70.3 percent); Memphis, Tenn. (69.1 percent); Fresno, Calif. (53.4 percent); and San Antonio, Texas (52.3 percent). Factors driving this dramatic growth include a growing share of homes in the Sun Belt that are now old enough to require upgrades and a shift in demand from newer homes at the urban fringe to older homes closer to economic centers.
- Consolidation squeeze. Despite a decade of growth in home-improvement spending, the remodeling-contractor base serving this market is still highly fragmented. In 2003, the top 10 remodeling firms captured just 1 percent of homeowner payments to contractors. In the meantime, major consolidation within the homebuilder and product-distribution sectors has led to dwindling supply options for smaller remodeling contractors. The pro dealer share of sales to remodeling contractors shrank from 24 percent in 1997 to 18 percent in 2002 while home centers and warehouse retailers expanded their market share.
"The endangered species could be the small remodeling contractor," says Bill. "They are increasingly competing with larger builders that have the capacity to extract significant discounts from their suppliers because of the volume of their business. And pro dealers realize they can get better returns by focusing on the larger homebuilder."
To maintain relationships with major distributors of building materials, smaller remodeling firms may need to form buyer cooperatives or bulk up in size by forming partnerships, Bill advises.
- Rising home equity. . The rapid accumulation of home equity has become a major driving force behind consumer spending in general and home improvement spending in particular, states the report. Owners of high-value homes ($400,000 and up) account for 43 percent of total spending on room additions and one-third of total spending on kitchen and bath remodels. They also spend nearly twice as much on routine improvement projects as do owners of lower-valued homes.
"Continued growth in homeownership, along with record levels of income and wealth, make it much more likely the remodeling sector will be able to sustain 3 percent average annual real growth over the next decade," says Nicolas.
Bill agrees. "This market is pretty resilient. A lot of folks have gotten into the remodeling habit. They want to keep their current homes up to date."
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