Growing Home Sales to Fuel Remodel & Renovation Market in 2016
Home remodeling is expected to soon kick back into gear. LIRA, the Leading Indicator of Remodeling Activity produced by the Joint Center for Housing Studies at Harvard University is projecting that annual spending growth for home improvements will accelerate to 4.0% by the first quarter of 2016.
LIRA is designed to estimate national homeowner spending on improvements for the current quarter and subsequent three quarters. The indicator, measured as an annual rate-of-change of its components, provides a short-term outlook of homeowner remodeling activity and is intended to help identify future turning points in the business cycle of the home improvement industry.
Expenditures on remodeling reached a recent peak of $146.0 billion in the third quarter of 2014 but declined over the following two quarters to an estimated $140.0 billion in the first quarter of this year. A lot of that decline was weather related, but shortages of skilled laborers are also having an effect. Second quarter totals were estimated at 144.7 billion.
Another popular data set for remodel and renovation activity comes from the National Association of Homebuilders “Remodel Market Index” (RMI). The quarterly report surveys renovation contractors and builders to determine their overall confidence in the remodel market. In the second quarter, NAHB’s Remodeling Market Index (RMI) rebounded two points to 59 (after having slipped slightly from 60 to 57 in the first quarter).
An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The RMI, which averages ratings of current remodeling with indicators of future activity, has been over 50 for nine consecutive quarters. This has been true for both current conditions and indicators of future activity. The rebound in the RMI is consistent with other signs of strength in the housing industry, particularly new and existing home sales.
“A major driver of the anticipated growth in remodeling spending is the recent pick up in home sales activity,” says Chris Herbert, Managing Director of the Joint Center. “Recent homebuyers typically spend about a third more on home improvements than non-movers, even after controlling for any age or income differences, so increasing sales this year should translate to stronger improvement spending gains next year.”
For new home buyers searching for a way to pay for their upgrades, both Fannie Mae and FHA offer popular renovation mortgage products. For FHA borrowers the decades old renovation mortgage standard – the 203k – remains a viable option as both a purchase mortgage and a refinance option.
Fannie Mae offers perhaps the best of the renovation mortgage loans with their HomeStyle loan. Also available for purchase and refinance, the HomeStyle opens up the renovation financing market to investors and vacation homeowners. FHA loans, including the 203k product, are only for home buyers and owners that occupy their property as a primary residence. In addition to the FHA and Fannie Mae rehab loan offers, many small to mid-sized banks are also expanding their renovation and construction product offerings. Generally, when they real estate / housing market is strong and expected to appreciate, mortgage lenders expand their riskier options to capitalize on market growth.