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6 reasons home renovations are booming

Richard Barrington | Improvement Center Columnist | October 23, 2012

It seems Americans have decided that moving up does not mean moving out.

While home sales have been slow to recover, home improvement sales are surging. The trend for millions of Americans is to upgrade what they own, not buy another dream house.

Home improvement activity takes off

The U.S. economy is barely treading water. The housing market has made a little progress, but is nowhere near what it used to be. Against this rather uninspiring backdrop, the boom in home improvement activity stands out brightly.

The Harvard University Joint Center for Housing Studies puts out an index called the Leading Indicator of Remodeling Activity (LIRA), which tracks trends in U.S. remodeling activity. Based on LIRA, the trend is turning sharply upward.

LIRA figures show that in the first quarter of 2012, U.S. remodeling spending posted its strongest performance since 2009, with 12-month total spending reaching $114.8 billion. Looking forward, LIRA projects that the best is yet to come. LIRA estimates that by the first quarter of 2013, U.S. spending for remodeling will reach $128.9 billion, a 12.2 percent year-over-year growth rate.

On more of a micro-economic level, The Home Depot has seen its revenue increase this year. The home improvement retailer's revenue grew by 11.2 percent in the fiscal quarter ending April 28, 2012, and then by 15.5 percent through July 28, 2012.

Home Depot Revenue 2012

What accounts for this upswing? One explanation is that e-commerce has created new marketing opportunities for such retailers. While the hands-on nature of home improvement stores may make them seem far removed from the cutting-edge world of electronic commerce, Lowes had the second most popular online coupons (behind only Target), according to Google; and this year comScore has identified both The Home Depot and Lowe's as among the leading retailers for smartphone visitors.

6 possible reasons for the home improvement boom

Why is home improvement suddenly hot right now? After all, it's not as if the economy in general is firing on all cylinders. However, along with the following possible reasons, the slow-growth environment may actually be contributing to the trend toward home improvements:

  1. Home prices are still off peak. Despite some improvement in recent months, the S&P/Case-Shiller Home Price Index is still well below its 2006 peak. Depressed housing values mean many mortgages are under water -- Harvard's Joint Center for Housing Studies estimates that 11.1 million homeowners owe more than their homes are worth. For even more homeowners, weak prices mean this is a bad time to sell. As a result, improving the current home might be a more viable option than moving for many Americans.
  2. Pay increases are modest. Americans like to imagine themselves moving up in the world, from rental to starter home to dream house. Unfortunately, a sluggish economy has stalled that dream for many people. Through the middle of 2012, average wage and salary growth in the U.S. was just 1.7 percent over the prior 12 months, after having been just 1.6 percent the previous year. Incremental income growth calls for incremental improvements -- such as fixing up your current home rather than moving to a new one.
  3. The fixer-upper demands attention. Of course, many Americans have been able to benefit from the housing slump by buying foreclosure properties or other distressed sales. The new owners of these fixer-upper properties are working to give them the attention they need.
  4. Multi-generation families are in. According to the Pew Research Center, the percentage of Americans living in multi-generational households (comprising more than one generation of adults) is at its highest since the 1950s, and nearly twice the level it was in 1980. When elderly parents move in or struggling young adults move back home, it may take a few remodeling tweaks to make living arrangements work -- an extra bathroom here, a new door there.
  5. Baby boomers are far from babies. The leading edge of the baby boom generation has reached retirement age, and those who don't want to give up their homes may find a few physical accommodations, such as ramps and handrails, allow them to continue to live independently.
  6. Homeowners have time on their hands. With unemployment remaining stubbornly high, "I'm too busy" is no longer a viable excuse for not tackling that long-overdue home improvement project.

If any of these reasons resonate with you, you might have the urge to head to the nearest home improvement store. When you do, expect to find plenty of company there.

About the Author

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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