Remodeling rebounds in 2012: What's ahead?

Michele Lerner | Improvement Center Columnist | September 6, 2013

The remodeling market rebounded in 2012 and researchers anticipate continued improvement in that economic sector in 2013. Improving home values are one reason that homeowners are expected to increase their spending on remodeling projects. Even if you don't have enough equity to borrow against for your renovation work, you are more likely to spend money on improving an asset that is increasing in value rather than one that is losing money.

Remodeling by the numbers

The Leading Indicator of Remodeling Activity (LIRA), an index published by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, predicts that remodeling activity in the first quarter of 2013 will increase by 12.2 percent to $128.9 billion. If that prediction comes to fruition, this will be double the predicted growth in the fourth quarter of 2012 above the third quarter of 5.9 percent to $120.7 billion.

Hanley Wood, a media and research company that covers building and remodeling, predicts in their Residential Remodeling Index that the number of remodeling and replacement projects will reach 10.5 million in 2013 compared to an estimated 10.1 million in 2012.

The National Association of Home Builders (NAHB) publishes a Remodeling Market Index (RMI) each quarter that averages ratings of current remodeling activity with indicators of future remodeling activity. The RMI reached 55 in the fourth quarter of 2012, up five points from the third quarter of 2012. Any RMI above 50 shows that more remodelers are reporting that remodeling activity is increasing rather than decreasing. The most recent RMI was the highest reading since the first quarter of 2004.

Types of remodeling projects

The Joint Center for Housing Studies of Harvard University recently released their report, "The U.S .Housing Stock: Ready for Renewal", which says that remodeling activity has increased in recent years for several reasons:

  • Foreclosed properties needed to be rehabilitated.
  • More homeowners are interested in making sustainable home improvements and increasing their energy efficiency.
  • The aging population means that there are increasing numbers of older homeowners who need to retrofit their homes to meet their needs.

In addition, the study says that the future for remodeling looks bright, with echo boomers expected to outnumber baby boomers by more than 12 million during their peak years of homeownership and renovation activity.

The American Institute of Architects (AIA) Home Design Trends Survey, which covers activity through the second quarter of 2012, shows that design work for improvements on existing homes remains strong, with billings up for the second consecutive quarter. The types of remodeling projects that are the most popular are kitchen and bath remodels as well as additions. Homeowners continue to add home offices and mudrooms or "family foyers" to their homes, although the pace of putting in those special features has slowed a little over the past year. Outdoor living rooms are also a popular home remodeling project.

Projects that have declined in popularity are home theatre/media rooms and exercise rooms.

Aside from the addition of these special functions and the perennial popularity of improving kitchens and baths, the Home Design Trends Survey also reports that homeowners are interested in making home improvements that enhance the energy efficiency of their home and make it easier to age-in-place. For example, many homeowners are adding energy management systems to their homes along with attic insulation. For aging-in-place, homeowners are choosing to convert space for a first-floor bedroom, adding a ramp or elevator and installing non-slip flooring and easy-to-use handles and faucets.

Remodeling in 2013

The RMI future market indicator increased to 56 in the fourth quarter of 2012 compared to 49 in the previous quarter. In particular, remodelers report strong activity among owner-occupied homes rather than by real estate investors. NAHB Chief Economist David Crowe said in a press release that increasing remodeling activity is closely tied to rising existing sales, since many new owners opt to renovate as soon as they purchase a home.

Rising consumer confidence in the strength of the economy and the stability of their income appears likely to encourage more homeowners to make home improvements that they have postponed while waiting for home values to rise and for the economy to recover.

About the Author

Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.