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Home Improvements Increase in Weak Housing Market

Demand for home improvements is growing among owners frustrated by attempts to sell in a depressed housing market.

 The bleak housing market has become a boon to the remodeling industry as discouraged homeowners abandon plans to sell and turn instead to home improvements.

Remodeling activity has increased 24 percent in the last year, according to an index released this month by the website BuildFax, which tracks home building, remodeling and repair. The index has shown gains for the past 21 consecutive months and in July reached a record high of 130.4. The data reflects construction permits filed with local building departments across the country. The initial value of 100 was set in April 2004.

“As millions of Americans believe that they will not be able to secure a new home due to a variety of factors including tight credit, limited buyers and challenging job prospects, they are more and more turning to renovating and remodeling their current properties, sending remodeling activity to record levels,” said Joe Emison, vice president of research and development at BuildFax.

Homeowner spending on remodeling peaked at $145 billion in 2006 but had fallen to $116 billion by 2009, according the National Association of Home Builders. The association expects spending on home improvements to increase steadily through this year and next, reaching $131 billion by 2012 and eventually recovering completely.

"It's rebounding. More people are deciding to stay in place and fix up their homes," said Stephen Melman, the association's director of economic services. "They can't sell their existing house, so they can't move to another one. They decide to fix the one they have."

 Spending on home improvements should eventually return to levels seen in the late 1990s when expenditures on home improvements rose buy 5 percent to 6 percent each year, according to report on released this month by the Joint Center for Housing Studies at Harvard University. Remodelers are expected to capture a growing share of money spent on housing as owners satisfy pent-up demand for improving homes with underwater mortgages or currently in some stage of foreclosure.

Sales of home improvement products have fallen short of forecasts by the Home Improvement Research Institute, which has revised its expectations downward to 2.8 percent for total 2011 sales. The institute predicts sales will average 3.7 percent over 2012 and 2013 and will strengthen to an average of 5.8 percent in 2014 as the job and housing markets improve. 

A glut of distressed homes for sale, more limited mobility among homeowners and green technologies will be key drivers of demand for home improvements,” said the Harvard study, titled “A New Decade of Growth for Remodeling.”

Buyers of distressed homes spend significantly more on home improvements than owners who buy typical properties, said the study, noting that “as distressed properties work their way through the foreclosure pipeline, home improvement expenditures will increase.” 

At the same time homeowners unable to sell due to depressed prices and tighter lending practices are also likely to upgrade their dwellings. A study of 1,356 investors conducted by Millionaire Corner in June found that 70 percent had a friend or close family member who was having trouble selling their home. “As owners make a longer-term commitment to staying in their current homes, they may be more likely to undertake certain improvement projects,” said the study. Rising energy costs and the development of green technologies will increase demand for remodeling projects to improve a home’s energy efficiency.

The website estimates in the current real estate market homeowners will recoup an average of 60 cents for every dollar spent on home improvements. The average return on home improvements, which was 67.3 percent in 2008, has fallen steadily with home prices. Improvements offering the highest return include a new garage door, upscale siding, minor kitchen remodeling, adding a wooden deck, replacing windows, renovating an attic into a bedroom, finishing a basement, adding a second story and doing a midrange bathroom remodel.