John Burns Real Estate Consulting presented its mid-year 2021 remodeling market forecast and its multiple drivers — and things are looking good.
By Robert Isler
In its latest remodeling industry forecast, John Burns Real Estate Consulting (JBREC) projected the buoyant growth experienced by the industry is expected to continue, thanks in large part to government stimulus funds and elevated savings levels. Executives from the consulting firm spoke as guests of the Sola Group, publishers of design industry magazines. From start to finish, it was like witnessing an Olympic relay, as each member of the team covered much valuable ground before passing the baton.
Founder and CEO John Burns led off, explaining his firm’s collaborative, bottom-up approach for what’s trending in remodeling and new construction. He attributed his exuberant outlook for the industry to an unprecedented fiscal and monetary stimulus, combined with a vaccination program that’s finally getting people back out again. This, he said, has led to a “supercharged economy.”
The Power of Unprecedented Stimulus + Savings
Burns offered the numbers to back up his firm’s assessment. Three successive government stimulus plans had pumped over $5 trillion into the economy, with some who had lost their jobs actually making more money from generous unemployment benefits and the “COVID-19 bonus” than when they were working.
The unparalleled stimulus was put into place at the same time U.S. households were sharply reducing their spending, to the tune of $600 billion — the result of an inability to travel, dine out or attend leisure or entertainment venues because of severe pandemic restrictions. Even everyday activities like commuting to work were curtailed for many people. Burns noted that the combination of those factors translated nationally into $1.9 trillion in savings, or $15,000 per household. The majority of those savings were destined to be fed back into the economy, with remodeling very much a part of it.
Burns then rattled off factors that clearly support the positive outlook for the remodeling industry. Among them, the need to retrofit houses to align with work-from-home status, the purchase of second homes, demand for new homes and even an increased divorce rate — which results in new households being set up. He explained that although real GDP was off by 3.5% in 2020, experts expect a gain of 5.5% to 8% for this year. In plain English, he said, it means “the economy is off to the races.”
Economic Indicators: All Green
Burns shared that almost every traditional economic indicator has been pointing to growth, including GDP, sales and construction/remodeling activity with new and existing homes, wages, income and job growth. He noted that there are currently a record 9 million job openings and 2 million more job hires than at any time over the previous 20 years. Four million people actually quit their jobs because of their level of confidence in finding new ones.
Numbers of homeowners and renters are also up, however, affordability remains a challenge for many. While mortgage rates are still relatively low, home prices have escalated, largely owing to a dearth of inventory of homes for sale, and supply-chain delays and labor crunches thwarting new construction. Overall, leading economic indicators have been at their highest levels in nine years. He did caution, though, that these are short-term indicators, and reminded viewers that indicators had also shown particular strength a few years prior to the Great Recession of 2008.
The Macro Case for Housing
Turning to the macro picture for housing, Burns noted the significant price appreciation of homes, adding that home-equity levels are currently the highest they have ever been. Although the housing supply is low, a clear contributor to that appreciation, it’s not as low as many believe. Low mortgage, fed funds and home-equity rates for remodels have fueled the growth. His forward-looking interest-rate scenario, based on what the bond market is saying, calls for rates to hit 3.3% by the end of this year, and 4% by 2024.
Sharing a chart of stock market performance, Burns noted that although the S&P has increased an impressive 38%, many stocks related to housing were up twice that amount or more. “The stock market, which votes with its dollars, says the industry has a great future,” he said.
“The stock market, which votes with its dollars, says the [remodeling] industry has a great future.” — John Burns, founder & CEO, John Burns Real Estate Consulting
However, covering his bases, Burns also mentioned a recent Fannie Mae release revealing that consumers are now saying it is no longer a good time to buy a house, but it is to sell.
Next up was Todd Tomalak, principal at JBREC. He drilled down to the nitty-gritty, noting the correlation between where people spend their time and where they spend their money. Last year, a lot of time was spent at home. There was a 12% pause in planned remodels during that period, but also a 22% increase in unplanned projects, mostly DIY in nature.
A Return to Normal Foot Traffic? Maybe Not
Tomalak noted that foot traffic in coffee shops and sit-down restaurants is back to where it was in 2019, then rhetorically asked that if spending is normalizing for these types of activities, whether the bump enjoyed by the remodeling industry should begin to recede. Before answering, he noted that in some instances the patterns shot right past the old norms and into the realm of splurging. Mall traffic is double what it was in 2020 and 25% ahead of 2019. Casino visitation is 50% higher than 2019 levels. He called this phenomenon “revenge spending,” as people sought to make up for lost time.
Multiple Forces are Driving the Remodel Market
Although foot traffic at Home Depot is tracking a little below the pace of 2019, consumers are increasing their usage of search terms related to home improvement compared to the period prior to the pandemic.
Tomalak also noted that the smaller, spontaneous remodels occurring during the lockdown in 2020 often lead to “echo remodels” this year, as a small project in one part of the house generates more of them elsewhere. This domino effect was found to be historically true, with 11% more spending above and beyond the initial spend. That earlier-cited 22% increase in unplanned projects during the pandemic therefore can provide a solid impetus. Adding to the positive scenario is that there were only 10 large projects done for every 100 households because of the pandemic. Such ratios are normally found at the bottom of a recession, so there is much ground to be made up.
The Future Looks Bright
Tomalak explained something even more critical to the long term health of the remodeling industry. In general, homes — and particularly kitchens — are ripe for remodels after 16 to 20 years, when 80% of the features have become outdated. He estimated that 46 million homes built in the mid-1990’s were due for a remodel before the pandemic struck, based on the backlog of outdated remodels and aging new builds. During COVID-19, that number hit 49 million, and by 2022, it’s estimated to reach 51 million. The 2022 number is about 7% higher than 2019. If projects put on hold during COVID-19 are added to the mix, the growth easily scores in the double-digits. Additionally, homeowners have more equity than ever, which truly bodes well for the industry’s outlook.
Overall, Tomalak expects a 5% increase in home-improvement spending for 2021, but 11% for larger projects. Longer term, high-end projects should consistently lead all others, with projections for annual gains of 12%, 13% and 8% for 2022, 2023 and 2024, respectively.
(Note: If these numbers sound modest compared with the robust projections cited in NKBA’s Kitchen & Bath Market Outlook July update, it’s because JBREC considers the whole house, while NKBA’s focus is on the kitchen and bath sweet spot.)
Tomalak passed the baton to Steve Basten, Vice President at JBREC, who spoke of the U.S. Remodeler Index growing by 8% in the most recent quarter. Geographically, the largest increases in remodeling are in the Southwest and Southeast, with Texas, Arizona and Florida the standouts. He confirmed Tomalak’s take on the outlook for larger projects, citing a JBREC survey of remodelers where 63% said high-end projects are most in demand. He closed by saying that the challenge continues to be supply-chain delays and labor shortages.
