Declining Economy Puts Brakes on Remodeling

MBA (10/13/2008 ) Palaparty, Vijay
Remodeling activity among homeowners declined 15 percent this year—mostly in areas where homeowners have less equity—according to a report from Remodelormove.com, Sunnyvale, Calif. Eighty-four percent of respondents said possibility of a recession affected their remodeling plans.
Homeowners reported an average of $190,000 in home equity and average home value of $390,000—up by $140,000 and $342,000 respectively. The report, 2008 Remodeling Sentiment Report, corresponded with the U.S. Remodeling Permit Activity Report, also from Remodelormove.com, which showed an increase in the average cost of a remodel in markets with most expensive homes and a decrease in regions with average- and below average-priced homes.

“Homeowners who choose to remodel their homes may find this a good time,” said Dan Fritschen, real estate author and principal researcher. “With new home construction at low levels, more materials and labor are available for remodeling than several years ago, resulting in shorter project schedules and often lower project costs.”

Eighty-one percent of respondents said they plan to start their home remodel this year nonetheless.

Decline in home equity line of credit originations could be one reason for the slowdown. Benchmark Consulting International, Atlanta reported a 26.4 percent decrease in HELOC originations between the first and second quarters among small/medium-sized lenders. Applications decreased 33.8 percent, though from a book-to-look perspective, borrowers' interest found renewal in the second quarter, with the rate rising by 5 percent to 49 percent from 44 percent in the first quarter.

“With tightening of credit standards, tougher underwriting guidelines and less direct marketing focus, it is understandable why applications are down so significantly,” said Brian King, senior vice president at BenchMark Consulting.

In July, Harvard University’s Joint Center for Housing Studies reported a decline at an annual rate of 11.1 percent in home improvement activity.

Nicolas Restinas, director of the Joint Center for Housing Studies said the slumping economy and struggling housing sector will drag spending on home improvements. “Households are reluctant to undertake major improvements in the context of falling prices,” he said.

McGraw-Hill Construction, New York, however, reported that building green is advantageous, even in a down market. Forty percent of builders reported that building green eases marketing; 16 percent said it is much easier.

“Green building has definitely reached its upper tipping point,” said Harvey Bernstein, vice president of industry analytics, alliances and strategic initiatives at McGraw-Hill Construction. “Builders can no longer ignore the market advantages of green building. Especially considering today’s market and current economic situation, builders need to differentiate themselves from their competitors and hold steady or prosper in the down economy. Green building gives builders opportunity to expand their market share and ride out this economic slump.”

In 2009, 21 percent of builders expect 90 percent of projects to be green and that 60 percent of homebuyers will pay more for green homes.