Home Remodelers Down But Not Out

Demand for upgraded kitchens and the like is weak right now. But the longer-term outlook is still bright.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

February 20, 2007

The $300-billion home-remodeling business is a solid long-term bet, even though it isn't generating a lot of jackpots right now. Spending on household upgrades will hold roughly steady this year after a measly gain of about 3% last year. Annual growth averaged about 7% in the first half of this decade.

The current downturn is tracking the drop in home sales, which pinches remodeling firms from two directions: fewer sellers sprucing up their digs to attract bidders and fewer buyers ripping apart rooms to meet their tastes.

But the country's more than half a million remodeling companies—primarily small contractors—aren't looking at a prolonged slump. Odds are that home building will begin to pick up by next year or 2009 as steady population growth fuels demand. And over the next decade or more, as legions of echo boomers—the children of baby boomers—buy their first houses and their parents adapt living spaces for retirement needs, remodeling firms will be sitting pretty.

Another big feather in remodeling companies' caps: Two-thirds of the U.S. housing stock is more than 25 years old. These aging houses, spread throughout the country, will fuel spending on items such as siding, roofing, heating and air-conditioning and energy-saving windows. In newer houses, most upgrades tend to focus on kitchens, bathrooms, garages, patios and fences.

The many new houses purchased during the recent real estate boom will also generate business in the next few years. Amal Bendimerad, a researcher with the Joint Center for Housing Studies of Harvard University, notes, "Buyers of new homes often spend on projects after about five years" of living in the house.

Remodeling's share of residential construction dollars fell from 45.4% in 1995 to 39.7% in 2005 as new-home building surged in this decade, but the share is likely to rebound to around 47% by 2015. Kitchens and bathrooms remain the most popular areas of improvement, making up about a third of remodeling spending, up from roughly 20% a decade ago.

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