Zonda principal Todd Tomalak discusses slowing home sales, oppressive costs and declining real income as they relate to home improvement.
By Dianne M. Pogoda
Five months ago, the supply chain could not keep up with the incredible demand for housing, in new construction as well as remodeling. But times are changing rapidly, and with them, the outlook for the remodeling industry.
At the recent NKBA Futurist Summit, Todd Tomalak, Principal of housing research firm Zonda’s Building Products practice, said that despite home sales slowing and inflation that’s outpacing wage growth, projections for the remodeling industry are still pretty strong.
The virtual summit was presented in partnership with Zonda and sponsored by Signature Kitchen Suite.
Current Conditions
Existing home sales are down about 20 percent from the beginning of the year, and that is expected to get worse. “But I’m not overly concerned about this number,” said Tomalak. “We have seen existing home sales decline, but remodeling does just fine. This has happened in the past, as recently as 2018. When there are unusual conditions — like a housing shortage but wages are continuing to grow — remodeling still does OK. Households now are sitting on more home equity than ever, and that means there’s less chance of forced sales or home price declines.”
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Inflation and real income are of more concern, he said. Right now, inflation is outpacing wage growth, so real income is down in the past year. He explained how this is likely to impact remodeling. For instance, what happens if a project is booked, but unexpectedly, the homeowners’ household income drops by 10 percent? Zonda surveyed homeowners who had projects in progress, and asked what they’d do with the hypothetical income loss. They found that only 3 percent would cancel altogether; 27 percent would continue as planned; 36 percent would continue but use less expensive products or materials, and 34 percent would postpone.
For those homeowners who opt to scale back on products or materials, they are more likely to maintain higher-quality in categories like roofing, HVAC and insulation, and opt for lower-cost materials in categories like flooring. “It’s a bell-weather category, because it’s highly discretionary and you can get a nice result with a less-expensive product, or even do-it-yourself,” he said.
Learning From History
Tomalak then examined the housing outlook in historical terms, weighing factors like inflation, supply-chain issues, housing and labor shortages, surging energy prices and high home prices— most of which were happening during prior recessionary cycles. He said we can often predict what will happen in the short-to-medium term based on past performance. For instance, during the late Seventies and early Eighties, inflation was high, energy costs were surging and home prices had peaked — similar to today. At that time, remodeling generally thrived because people were investing in their current homes rather than buying new ones.
When home prices started to decline as mortgage rates rose, consumers continued to remodel for a while, although that activity soon softened for a couple of years. After prices stabilized around 1984, however, remodeling surged 20 percent across the board, because of projects that had been postponed or scaled back, Tomalak said. While existing home prices and sales fell, people moved less often and instead engaged in moderate renovation — the “interior refresh,” as he called it — that updates without moving walls.
“The interior refresh costs less, but it still improves the value of the home,” he noted.
Looking Ahead
Foundational factors underpinning the longer-term outlook for remodeling are strong, owing to the unique impact of aging housing stock.
“The sweet spot of remodeling for interior spaces is in houses that are between 20 and 49 years old, concentrated between 20 and 39 years old,” Tomalak explained. “This is when products, systems and efficiencies start to become outdated and require replacement, but the bones of the home are still good. Looking at the next few years through 2030, we’ll see a spike in single-family homes hitting that sweet spot between 20 and 39 years old. By 2026, there will be 24 million houses in that age range, representing growth of 16 to 20 percent.”
He added that exterior improvements are concentrated among homes between 20 and 49 years old, and then again over 60 years old, and full gut-and-rehab jobs are most common in homes over 60 years old. Younger homes, between three and five years old, get the lion’s share of improvement to outdoor spaces.
“When we look back at the decade between 2020 and 2030, it could look like a golden era of remodeling, with a recession in the middle,” he said. “We’re starting the cyclical slowdown for 2023-2024 now, but when prices stabilize, growth should resume, because fundamentals are still strong for remodeling.”
Minor projects, additions and gut-rehabs will be hit harder, with the sweet spot in mid-range remodels (without moving walls) — updates in the range of $7,000 to $35,000.
“For growth overall,” he projected, “we’ll see slowdowns at the entry-level and the most expensive ends, with overall growth of 12 percent in 2022 and 6 percent in 2023.”
The NKBA Futurist Summit is available to watch on-demand here.
