Spending on remodeling and home improvements has gotten off to a slow start this year, according to newly revised Census data. Remodeling expenditures have declined in each of the last five months, with the March estimate down 1.4% for the month and significant downward revisions for January and February. This dip comes after a healthy surge for improvement spending between the spring and fall of 2012.
This weakness is mirrored by the most recent NAHB Remodeling Market Index (RMI), which fell six points to 49. Despite the drop, the first-quarter reading is the third highest since the first quarter of 2006.
The slow start at the beginning of 2013 is surprising given improving trends for existing home sales, which are traditionally a useful indicator of the direction of the remodeling market. For example, the National Association of Realtors Pending Home Sales Index for March was up 1.5% and is 7% higher year over year.
Moreover, home values – and therefore home owner wealth – are improving. And higher wealth should help boost remodeling demand. The Case-Shiller Index (20 City Composite) was up 9.3% year over year, according to the February report. And according to the Federal Housing Finance Agency (FHFA), U.S. home prices rose by 0.7% in February, the 13th consecutive monthly increase. Over the past year, home prices have risen by 7.1%.
One possible explanation for remodeling’s slow start is the general challenges faced by builders and remodelers from rising building material costs and the availability of workers.
Residential construction employment is growing, albeit slowly. Data from the Bureau of Labor Statistics (BLS) indicates that total payroll employment for builders and residential contractors increased by 13,300 in April. Over the last 12 months, home building employment is up 84,000, but is only averaging gains of about 14,000 each month in 2013.
Given the increased demand for construction activity over the last year, the lack of more hiring means there are now more open positions in the construction sector. In fact, the BLS JOLTS survey indicates that the number of unfilled jobs in construction stood at 101,000 in March. This marks the third consecutive month that total has exceeded 100,000, the first such quarter since 2008.
A second possible explanation would be related to less-than-robust consumer confidence at the beginning of 2013. According to Thomson Reuters and the University of Michigan, the Consumer Sentiment Index fell by 2.8% in April. Conversely, the Conference Board reported that its Consumer Confidence Index is down 0.8% year-over-year.
It is not clear what interrupted the improvement of confidence witnessed in 2012, although it is reasonable to believe that the political drama surrounding the fiscal cliff had some impact. Regardless of the cause, these measures are consistent with other data, such as consumer credit reporting from the Federal Reserve that indicates that, for example, revolving debt (i.e. credit cards) was down 2.4% in March and basically flat for the first quarter.
Despite short-term ups and downs, housing continues its long-run improving trend. For example, the count of housing markets on the NAHB/First American Improving Markets Index (IMI) fell by a net count of 15 to 258. In spite of the small drop, which was mostly due to seasonal price declines in some markets, the current list represents 70% of all metros, with all states having at least one market on the IMI.
And underlying economic conditions remain positive for continued improvement for all sectors of residential construction. Interest rates remain low, with the average contract rate on conventional loans for newly built homes standing at 3.5%, according to FHFA data. And the Federal Reserve Board’s Senior Loan Officer Opinion Survey indicates that mortgage lending is expected to rise over the coming year, albeit with some downside risks due to profitability and potential GSE putback risk. Moreover, accommodative Federal Reserve monetary policy is holding long-term interest rates down.
While the homeownership rate continues to decline, falling to 65.2% for the first quarter of 2013 according to the Census Bureau, rising numbers of buyers of new and existing homes should slow future declines. Some additional reduction in the rate will occur as pent-up housing demand is unlocked, producing more renters than owners in the short term. However, these forces should not push the homeownership rate much below 64%, a rate comparable to 1995 levels.
Finally, given that May is National Remodeling Month, NAHB economists used data from the 2011 American Housing Survey to examine improvement-related spending. The analysis found that while 37% of all home remodeling projects over the 2010-2011 period were do-it-yourself (DIY), only 18% of total remodeling spending was DIY. Such projects tend to be smaller, require less technical training and expertise, and cost less, with median household DIY spending over the two-year period totaling $950. Median spending on professional remodeling projects over the two-year period was about $4,000.
These data are a reminder of the economic potential of the remodeling sector. Earlier NAHB research has found that that every $10 million of remodeling spending creates 111 full-time equivalent jobs as well as associated economic benefits including taxes paid to state, local and federal governments.
Such housing growth is particularly important now. After a disappointing GDP growth report for the fourth quarter of 2012 (0.4%) and a lackluster first quarter (2.5%) estimate, the continued recovery in housing can lead the economy to sustainable growth and job creation. In fact, over the last six quarters, expansion of home building and remodeling has been responsible for 20% of national economic growth.