Lisa Chapman - Business Coaching, Planning and Due Diligence

In the aftermath of the mortgage market meltdown, home-ownership has lost some of its appeal. In addition, some households that would otherwise buy homes are no longer able to qualify for loans under today’s more stringent underwriting standards. As households increasingly choose to rent rather than own their housing, the need to invest in the nation’s aging rental stock will provide a prime opportunity for remodeling contractors.

Meanwhile, immigrant households represent an increasingly important segment of the housing market. Between 1995 and 2007, the number of immigrant households rose from 9 million to more than 15 million. When immigrants arrive in the country, many initially rent. As they climb the economic ladder, however, they move into homeownership at rates comparable to those of the domestic-born population. As a result, foreign-born homeowners will account for a growing share of improvement spending in the years ahead.

With affordability a key priority, homebuyers are now looking for more efficient and cost-effective systems in their homes. More than 40 percent of the owner-occupied housing stock, along with almost half of the rental stock, was built when energy costs were much lower and environmental impacts were of less concern. Older homes thus represent a tremendous market for green remodeling. Sustainable housing retrofits also have growing appeal to a new generation of environmentally aware homebuyers.

During the decade when homeownership rates were soaring, the number of renter households fell from almost 36 million in 1994 to less than 33 million in 2004. Shrinking demand discouraged rental owners from investing in their properties and developers from building additional units. As a result, the median age of the rental housing stock now stands at 36 years, compared with 32 years for the owner-occupied inventory.

With the recent collapse of the for-sale market, demand for rental housing is now on the increase—both because homeownership has become less attractive and because many owners are losing their homes to foreclosure. High gas prices have also encouraged households to trim their commuting costs by moving closer to employment centers or public transportation options, where rental units are in greater supply. As a result, the share of renter households has grown in recent years .

Stronger demand should generate greater investment in the aging rental stock. Nearly half of rental units were built before the 1970s, and only 15 percent have been built since 1990. Combined with the normal wear-and-tear of high turnover rates, the aging of the rental stock has contributed to its general deterioration. In 2007, almost 10 percent of rental housing—more than 3.6 million units—was structurally inadequate.

 The poor condition of the rental inventory reflects years of neglect. Throughout the 1970s and 1980s, expenditures on the owner- and renter-occupied stock moved in tandem, although per unit spending averaged about 30 percent less for rentals primarily because of their smaller size. Beginning in the early 1990s, however, their paths began to diverge. Average per unit improvement and maintenance expenditures for rental units fell by almost 40 percent in inflation-adjusted terms between 1990 and 2007, while expenditures on owner-occupied units increased almost 30 percent.

Rental housing therefore represents a growing market for the home improvement industry.

 The Growing Immigrant Market

Immigrants are key to the future growth of the US home improvement industry. In 2007, foreign-born households spent about $23 billion on improvements to their homes (Figure 23). Their spending levels have grown almost 13 percent per year since 2000—well in excess of the 7 percent among the domestic-born population. Growth was particularly strong during the middle of the decade when overall spending was rising rapidly. As a result, immigrant owners now account for more than 10.0 percent of home improvement expenditures, up from 8.5 percent earlier in the decade.

A large part of this growth reflects steady increases in the number of immigrant homeowners. But even on a per household basis, spending by foreign-born owners has equaled or exceeded that of their native-born counterparts in recent years. One reason for this spending strength is their age distribution: immigrants represent more than 20 percent of the population between the ages of 30 and 44, the years when families are typically growing, when space is at a premium,and when households may be inclined to modify the use of space in the home. This age group traditionally spends heavily on home improvements. In addition, immigrant households tend to settle in gateway cities along the California coast, as well as in Texas, southern Florida, and the Northeast corridor. In these high-cost housing

markets, owners devote a relatively large share of their incomes to home improvements. In the 12 metropolitan markets where foreign-born homeowners spent at least $500 million on home improvements in 2007, the immigrant share of expenditures was well above the national average of just over 10 percent. In five metro areas—Houston, Miami, San Diego, San Francisco, and Washington, DC—immigrants contributed more than a quarter of all remodeling expenditures.

Emerging Interest in Sustainable Remodeling

Coupled with growing concerns about global warming, the recent surge in oil prices has helped to reinvigorate the sustainability movement. Energy efficiency in homes has become a central focus, given that the residential stock is a major contributor to national energy consumption. With the sharp fluctuation in US energy costs since the 1970s, the energy efficiency of homes has improved, but only modestly. Advanced building techniques as well as more efficient equipment and appliances have helped to reduce energy usage in newer homes. According to a 2005 US Department of Energy survey, a home built in the 1990s uses about 40 Btus of energy per square foot, down from almost 50 Btus per square foot for homes built in the 1960s.

Sustainable design, however, goes well beyond energy efficiency. Motivated by broader environmental concerns, consumers have demonstrated a growing interest in products and projects that meet three additional green goals: quality and durability, environmental performance, and safety and disaster mitigation. In a recent survey conducted in conjunction with Specpan, the Joint Center asked a panel of full-service remodeling contractors about how frequently they installed green products that met at least one of these four criteria. The survey focused on 10 products listed by the Partnership for Advancing Technology in Housing (PATH) as having the “most promise for making our existing homes more durable, stronger and more resource efficient.”

To meet this emerging demand, residential building product manufacturers and distributors are offering a broader range of environmentally sensitive products. Remodeling contractors are also tapping into this market. Programs to certify home improvement contractors in green remodeling are among the most popular in the industry. Indeed, many contractors have chosen to focus on green remodeling, a specialization that allows them to focus their activities in a growing market niche and therefore operate more efficiently and profitably.

 As the housing market stabilizes and the broader economy begins to recover, remodeling activity will return to a more normal pace of growth. As credit conditions thaw, owners will find it easier to finance their home improvement projects. As home prices edge back up, owners will again see the wealth-building benefits of investing in their homes. And as sales pick up, recent buyers will want to make improvements as they settle into their new homes.

To read more visit http://www.jchs.harvard.edu/publications/remodeling/remodeling2009/r09-1_5_growth_markets.pdf.