Higher interest rates have slowed home sales. Now, rising borrowing costs threaten to put the brakes on the renovation boom.
Spending on home remodeling and renovation by stuck-at-home Americans helped the economy surge out of lockdown in 2020. Aisles at Lowe’s Cos. and Home Depot Inc. were swamped. Garage doors and appliances sold out. Demand overwhelmed makers of paint, wood panels and PVC pipe, leading to shortages. Lumber prices shot to more than twice the old record.
And to pay for it all, homeowners took advantage of historically low interest rates to borrow against their sharply more valuable homes.
Analysts who track the remodeling business say there are signs those days are over.
Though Americans have never had more equity in their homes, higher interest rates have made it more expensive to tap it through cash-out refinancings to pay for major repairs and renovations. Meanwhile, swooning stocks, declining home prices and budget-busting inflation tend to make Americans feel less affluent and hesitant to pump money into their properties. Lumber prices have dropped back to about where they were before the pandemic, around their long-term average.
The wealthy operating with a blank check won’t likely be deterred by higher financing costs, said Eric Finnigan, vice president of research and demographics at John Burns Real Estate Consulting. Nor will do-it-yourselfers planning to paint a room or replace a shower head.
It is big-ticket jobs such as new kitchens and additions that tend to be done by professional remodelers and paid for by borrowing against the value of the house that are most at risk, he said.
“That segment of the market is really tied to how wealthy homeowners are feeling,” Mr. Finnigan said. “That’s going to contract in a pretty big way this coming year, both in the number of projects and also the amount of dollars spent per project.”
Americans extracted $248 billion from their homes last year with cash-out refinancings, according to Freddie Mac, essentially swapping out existing mortgages for loans with higher balances and pocketing the difference.
That mountain of money has been keeping contractors busy, but it won’t last forever. Cash-outs dried up this year as interest rates rose, with volume in November down 81% from January, Mr. Finnigan said.
A quarterly gauge of future market conditions that his firm produces by polling members of the National Kitchen & Bath Association last month hit its lowest level in four years excluding early 2020, when Covid lockdowns caused market panic and work stoppages.
Craig Webb, a consultant who advises building-supply firms, said contractors remain solidly booked, even if the backlog of jobs is shrinking. “Things are slowing down, but it’s not like we’re slamming the brakes,” he said.
Another closely watched remodeling measure in October forecast spending to rise next year, but by a lot less than it has been climbing.
Homeowners, excluding landlords and house flippers, spent $418 billion on home improvement and repair over the 12 months that ended Sept. 30, according to the Leading Indicator of Remodeling Activity, which was developed by Harvard University’s Joint Center for Housing Studies. That was up nearly 18% from a year earlier and the model—which takes into account home sales, housing starts, remodeling permits, building-material sales and other economic data—predicts a 6.5% increase over the ensuing year.
That’s more in line with the long-term growth rate and reflects rising costs for materials and labor as well as the dampening effect of higher interest rates, said Abbe Will, associate project director of the housing center’s Remodeling Futures Program.
“We fully expect that to put a pinch on the market,” she said.
Renovations and repairs have gained importance to the producers of building materials as America’s houses have aged. About 40% of the lumber in North America is used remodeling and repairing houses, up from about 25% in 2000, according to West Fraser Timber Co., the continent’s largest producer. Sherwin Williams Co. says it sells about twice as much for residential repainting as it does for new homes, up from a roughly even ratio around the 2008 housing crash.
Shares of those firms, along with retailers Home Depot and Lowe’s and others in building supplies, were among the highfliers of the pandemic bull market, well outpacing the S&P 500. Lately they have fallen along with the broader market.
Executives say there are reasons for optimism despite the steep drop in single-family home starts, down by about one third from a year ago, and the decline in refinancing activity. They point to houses that haven’t been so old, on average, since World War II, more than $300,000 of home equity for the typical homeowner, the tendency of people priced out of new houses to work with what they already own, and the fact that stuff breaks no matter what the stock market or interest rates are doing.
“Two-thirds of home improvement spend is non discretionary,” Lowe’s Chief Executive Marvin Ellison told investors earlier this month. “If your refrigerator or water heater breaks, if your toilet stops working or if your roof is leaking, these are projects or purchases that cannot be postponed.”