With interest rates on the rise, homeowners who sat out of the pandemic market might feel they missed their chance to trade up. But there’s another solution that feels just as new: home renovations.
For owners of residential real estate, renovations have become increasingly enticing — and expensive. The home remodeling market may peak to a new height of $430 billion by the end of 2022, according to projections from Harvard University’s Joint Center for Housing Studies (JCHS).
Year-over-year, the home remodeling market increased a robust:
- 4.7% in Q1 2021;
- 5.7% in Q2 2021;
- 7.6% in Q3 2021; and
- 9.4% in Q4 2021.
2021’s nearly double-digit gains in expenses for home repairs and remodels came as a surprise even to the Joint Center for Housing Studies. Early on in the year, they projected the home remodeling market to have a much more moderate annual increase of 3.8% for 2021.
In Q2 2022, total homeowner expenditures for home renovations are projected to ramp up into double-digit territory, increasing 15.2% year-over-year and surpassing $400 billion for the quarter, according to JCHS.
By Q3 2022, JCHS projects the home remodeling market will increase a whopping 19.7% year-over-year to a total amount of nearly $430 billion.
The forces driving 2022’s home renovation boom are increases in:
- home sales activity;
- household incomes; and
- home equity levels, according to JCHS.
Related article:
California’s home equity gains in 2021 were the largest in the nation
Consumer preferences are another factor influencing the 2022 spike in home remodels.
Homeowners looking to put their money into assets such as real estate amid inflation concerns will have a harder time qualifying due to rising interest rates. Instead, they may turn to upgrades or repairs on their current residence, improving the home’s value.
The significant expenditures and market activity for home renovations will peak in Q3 2022 and then descend into more sustainable levels thereafter, according to JCHS projections.
Even though Q4 2022 will begin the renovation market’s descent, the JCHS still expects 17.3% year-over-year revenue growth in this quarter — to a tune of $432 billion. These steep gains in Q4 2022 will follow Q4 2021’s already sizeable year-over-year growth of 9%.
Thus, by Q4 2022, homeowners will be paying 29% more than they did in Q4 2020, and 32% more than in Q4 2019 when they spent $327 billion on home renovations.
Related article:
Home renovation FOMO
Consumer preferences are malleable, yet they considerably influence the housing economy.
Consumers themselves can be fickle — their preferences are difficult to predict and subject to change. Naturally, their psychology shifts with new information, experiences and market conditions. Just as in the pandemic, mass shifts in psychology directly influences economics — a phenomenon dubbed “animal spirits” by economist Robert J. Shiller.
As real estate professionals know from 2021’s hypercompetitive market, consumers are susceptible to the fear of missing out (FOMO) when making decisions. This includes big-ticket purchases like cars, furniture and homes.
In 2021, FOMO propped up home sales, sending prices to break-record highs. In 2022, FOMO threatens to reemerge with home remodeling projects, pushing prices of building materials even higher.
Rising costs of labor and construction materials, a shortage of contractors and builders and rising interest rates may discourage homeowners from engaging with home improvements, according to JCHS’s project director.
Homeowners in a position to delay their remodeling projects are most likely to become discouraged enough to stay out of the fray. But those with urgent repairs to complete will be steeped in competition. The axiomatic factors of supply and demand will play themselves out through 2022’s remodeling boom. [See RPI e-book Real Estate Economics Chapter 8.2]
A growing demand of owners desiring repairs and remodels paired with a restricted supply of materials and labor means price gains are imminent.
The construction material shortage has already been a factor causing builders’ confidence in their market to wane in 2021.
More recently, supply chain disruptions and inflation concerns further deplete builder confidence in 2022, according to the National Association of Home Builders (NAHB).
Inflation, as of March 2022, is a nail-biting 8.5%, according to the Bureau of Labor Statistics. For perspective, a normal inflation rate is typically around 2% or below, according to the Federal Reserve.
Due to supply chain disruptions, construction materials have more than doubled between 2019 and 2021. The rise in prices to offset building material delays will impact new home construction as well as home renovation projects.
Related article:
FARM the FOMO
A home renovation frenzy doesn’t bode well for home sales.
California’s inventory will remain low since building material and labor restrictions hold builders back from new construction.
In response to these factors, new home construction will become increasingly expensive and difficult to qualify to buy, on top of higher interest rates and decreased buyer purchasing power. These factors will all diminish home sales volume in 2022.
Real estate professionals might consider FARMing their neighborhoods using materials geared towards homeowners in the renovation stage.
2022 may see changing consumer preferences and thus, increased demand to renovate. At the same time, inflation, interest rates and building material prices may likely continue to rise. But there’s still time for owners to get their maintenance, repairs or remodels done before they’re priced out of yet another market and thrown into a second FOMO frenzy.
Consider reaching out to prior and new clients interested in remodeling or repairing their home and letting them know what kind of market to expect in 2022, as well as how to get the best return out of their renovations.
Related FARM letters:
Want to learn more about the principle of supply and demand in the real estate market? Click the image below to download the RPI book cited in this article.
The spending surge is expected to slow in the second part of the year, the school’s Joint Center for Housing Studies’ latest Leading Indicator of Remodeling Activity showed, tampered down by rising costs of labor and materials, as well as rising interest rates that may deter some from undertaking expensive home projects.