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Flush Homeowners Are Ready to Repair

29 January 2015 in Trading Ideas

The one-two punch of higher home prices and cheaper fuel has set the tone for an expected bump in home improvement activity.

Even before oil prices plunged in the last few months, housing analysts were expecting a windfall from the continued housing recovery.

As the Boston Globe pointed out this past summer, the growing economy, rising home values, and low interest rates have given homeowners the confidence and cash they need to raze walls, add rooms, renovate kitchens, build decks, paint siding, and spend on other projects to spruce up their homes.1

Spending on home remodeling, which peaked at about $145 billion in 2006, is on track to surpass that high by the end of the year, according to figures cited by the Globe compiled by the Joint Center for Housing Studies at Harvard University.

This growth has also meant more jobs for carpenters, painters, plumbers, electricians, and other construction workers. In Massachusetts, the Globe said, the increase in remodeling activity has contributed to a recovery in overall construction employment, which has gained about 18,000 jobs over the past four years, about half the number lost in the recession.

Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies, told the Globe that rising home values are contributing to the home improvement boom by giving owners confidence that investing in their homes will pay off when they sell.

During the downturn, when property values plunged and unemployment soared, consumers limited their spending to projects that could not be delayed, such as leaky roofs.

“People think house prices are not going to go down again anytime soon,” Baker said, “and they’re therefore more comfortable doing projects they were nervous about doing four or five years ago.”

The optimism has also translated into a rally for home improvement stocks. Over the short term, the Home Improvement motif is down 0.1%, while the S&P 500 us down 1.3% during that same period. However, the looking out a few months, the Home Improvement motif has gained 31.6% in the past six months. In that same time frame, the S&P 500 has increased 5%.

Over the past 12 months, the motif has risen 32.9%; the S&P 500 is up motif is up 15.7%.

Meanwhile, analysts at Fitch ratings see the upturn continuing, calling in a report last fall for spending on home improvement projects to grow by 6% both this year and next, thanks to gains in home prices and last year’s rise in home sales.

In 2012 and 2013, spending grew 5% annually.2

Fitch said it expected the market for home improvement products to reach $325.5 billion in 2014.

The analysts said they expect big-ticket remodeling projects will continue to lag overall growth in the remodeling sector as credit availability remains constrained.

“Nevertheless,” the report added, “there are indications that homeowners, although still cautious, are somewhat more willing to undertake larger discretionary projects and purchases.”

With consumers now enjoying an unforeseen drop in the price of oil and gasoline, these home improvement sector estimates could prove to be understated.

1Priyanka Dayal McCluskey, “Home remodeling rebounds as economy improves,” bostonglobe.com, Aug. 20, 2014, http://www.bostonglobe.com/business/2014/08/19/home-remodeling-rebounds-economy-housing-market-improve/ijKCdOneXPM7ar8griw8aM/story.html, (accessed Jan. 26, 2015).

2“Fitch: Home Improvement Spending to Rise 6% in 2014, 2015,” remodeling.hw.net, Oct. 13, 2014, http://www.remodeling.hw.net/benchmarks/economic-outlook-rri/fitch-home-improvement-spending-to-rise-6-in-2014-2015_o, (accessed Jan. 26, 2015).