The National Association of Home Builders Remodeling Market Index (RMI) increased to 46.5 for the first quarter of 2011 from its previous reading of 41.5 at the end of 2010. This is the highest level for the RMI since the end of 2006. However, the fact that the RMI remains below 50 indicates that still more remodelers report activity is lower than report it is higher (compared to the previous quarter). 

The RMI fell to a low of 22.1 in late 2008 during the height of the financial crisis. After that period, two tax credits (the Internal Revenue Code Section 25C remodeling credit and the 25D solar and other power production tax credit) likely provided a significant boost to the marketplace.

IRS Statistics of Income data for 2009, for example, indicate that nearly $6 billion in tax credits were claimed for these two energy-efficient remodeling tax incentives, which we estimate were used in connection with at least $20 billion in home improvement projects. These incentives likely boosted the market in early to mid-2009 and at the end of 2010. The 25D credit remains in place today, but the stimulus version of 25C expired at the end of 2010 and was replaced by a much more limited 25C credit.

The current release of the RMI also contained a special question asking remodelers to report the top reasons prospective customers are holding back from remodeling their homes:

• Customers think it is hard to get financing (90 percent of remodeler respondents)
• Customers have lost equity in their homes (81 percent)
• Customers are uncertain about their future economic situation (74 percent)
• Reluctance to invest in home when not sure home will hold its value (67 percent)
• Negative media stories making customers more cautious (62 percent)
• Inaccurate appraisals are making financing more difficult (54 percent)

Remodeling is important as both an economic activity for homeowners and those in the residential construction sector, but it also tracks well with total existing home sales.

So improved confidence among remodelers, as seen in the RMI, may also bode well for the growth path of existing home sales later this year.

ABOUT THE RMI: The RMI is based on a quarterly survey of professional remodelers, whose answers to a series of questions were assigned numerical values to calculate two separate indexes. The first index gauges current market conditions and is based on remodelers’ reports of major and minor additions and alterations, plus maintenance work and repairs, on both owner- and renter-occupied dwellings. The second index summarizes indicators of future remodeling activity  and is based on remodelers’ responses to questions about  calls for bids, amount of work committed for  next three months, job backlogs and appointments for proposals.