The housing market’s slowdown is going to kill the home renovation boom too

Published: Oct 31, 2018 3:19 p.m. ET12

Home renovation spending will still rise, just not as much

The stagnant housing market has been a boon for the remodeling industryfor the past few years as more homeowners stayed put, adding footage, upgrading features or retrofitting their houses to allow them to “age in place.”

But now the housing market’s funk has become deep enough that it’s dragging down remodeling.

The pace of spending on renovations is likely to start declining next year, according to a report out Thursday from the Joint Center for Housing Studies of Harvard University.

Harvard’s Leading Indicator of Remodeling Activity touched a decade high of 7.7% this year, but annual increases in remodeling expenditures are projected to drift down to a 6.6% annual increase at this time next year.

That’s still a healthy pace of growth, and represents about $350 billion in spending, the Joint Center said.

See: America is house-rich but cash-poor — and these businesses see opportunity

But this turning point is noteworthy as a housing indicator in a few ways. Most significantly, it signals that a major work-around Americans had devised for dealing with an uncooperative housing market can’t overcome its inertia. As the Joint Center’s director, Chris Herbert, explained, frustrated would-be house hunters are just one of the drivers of the surge in remodeling spending. Actual house hunters are another — and if their numbers thin even more, so will their spending.

Low for-sale inventories are presenting a headwind because home sales tend to spur investments in remodeling and repair both before a sale and in the years following,” Herbert said.

Another headwind: rising interest rates. They’ll make buying homes more challenging for many Americans, and also increase the cost of tapping home equity for big projects.

The housing slowdown is also likely to weigh on some of the players that have benefitted from this iffy situation over the past few years. On Wednesday, Credit Suisse analysts downgraded shares of Home Depot HD, -0.37%   and Lowe’s Cos. LOW, -1.33% citing slower growth in home prices, among other factors.

Also see: Home-price gains decelerate to 11-month low as housing market tries for a soft landing

“Home prices have been a key driver of big-ticket projects, supporting strong average ticket growth (similar to this point in prior cycles), and driving nearly all of the [comparable sales] growth as of late,” the analysts wrote.

“While there are plenty of other drivers as we analyze, e.g. a healthy U.S. consumer, population and household growth, aging homes, market share [with a reduction in competition from Sears], Home Depot’s strategic initiatives, Lowe’s turnaround efforts, history suggests less home price growth equals lower repair/remodel urgency, potentially creating a near-term air pocket,” they wrote, stressing that they don’t expect the retailers to “unravel.”

Still, some strategists have long considered Home Depot stock a bellwether on the economy for its unique role in serving American consumers and the housing market.

That’s a key point of the Joint Center’s report as well: it is, in the group’s words, “intended to help identify future turning points in the business cycle of the home improvement and repair industry.” Those turning points are clearly seen in the chart above, and they correspond with moments when the economy also took big turns.

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