Homeowners pulled out more than $152 billion in cash-out refinancing in 2020, nearly double 2018 levels.

By Robert Isler

Home equity, it appears, is the new winning Lotto ticket.

According to Kermit Baker, founder and director of the Remodeling Futures Program at Harvard University, the 3% increase in remodeling revenues from 2019 to 2020 — despite the pandemic — marked the 10th consecutive year of growth, with 2021 sure to continue that trend. The key to the vigorous growth is the spike in home values, allowing homeowners to take cash out for projects.

Baker presented these findings at Harvard’s annual spring conference, which, for the second consecutive year, was forced by COVID-19 to be held virtually. But the highly relevant update on the state of the remodeling industry pointed to a number of key drivers of a robust market in which home equity plays a critical role.

Homeowners pulled out more than $152 billion in cash-out refinancing in 2020, nearly double 2018 levels, with over half earmarked for home improvement.

The whole-house remodeling total of $417 billion is 57% higher than the $265 billion of 2010, the first year it was tracked, said Baker, who will be retiring in June. Home prices appreciated by more than 10% last year, and are almost 30% higher than at the peak of the housing boom just before the 2008 recession. As a result, equity in the home has been rapidly building, 30% higher in 2020 than in 2019. According to Freddie Mac, owners pulled out over $152 billion in cash-out refinancing in 2020, which was 40% higher than in 2019, and nearly double that of 2018. Based on these numbers, it’s hard to believe there was a devastating pandemic plaguing most of 2020.

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So what have homeowners been doing with their equity windfall? According to a survey conducted by the Federal Reserve Bank of New York, 53% have been using it for home improvement or renovation, 43% have paid  down debt, and the remainder have used it to buy a vehicle or other large purchase. Since over half of that considerable equity has been used for the home, it’s not surprising that by last fall, the number of projects as well as their scope, were clearly on the rise. That trend remains in place and is in line with the feedback recently received through NKBA’s first quarter 2021 KBMI survey.

Disaster Rebuilds

A subject not often discussed but one that is slowly growing in significance is home improvement resulting from natural disasters. A few decades ago, natural disasters resulted in average annual losses of $25 billion. That total has ramped up considerably, and currently averages $100 billion. It was a staggering $300 billion in 2017.

Home improvements directly resulting from these disasters had been under $10 billion in the 1990’s. By 2019, they stood at $25 billion. In the scheme of reasons to remodel, which are led by a home’s age, a lifestyle change by the homeowner, a move to a new home, or an increase in homeowner equity discussed earlier, home improvements had been just 5% of the pie a few decades ago. They have recently doubled, and currently stand at 10%.

Changes in Construction’s Labor Force

Perhaps the most interesting topic covered by Baker was that of labor within the construction industry. Demographically, the composition of employees has changed noticeably in a relatively short period of time. For instance, in 2003 about one in five, or 21%, of those employed within construction were foreign-born. By 2019, the percentage had increased to three in 10, or 29%. During the same period, the number of women in construction has grown as well, although they have a long way to go until they make meaningful inroads. In 2002, they represented 3.2% of the industry and now stand at 3.8%. Perhaps most telling — and concerning — are the changes seen by age. In 2002, 56% of construction workers were under age 40. That number has decreased to 47%. Meanwhile, those aged 55+ have increased from 14% to the current 23%. If ever there were a reason to step up efforts to recruit at the high school level, these statistics are the wake-up call. Those who lost jobs due to pandemic layoffs also tend to be younger, providing another pool of potential employees.

Consolidation Continues

Baker then turned to the evolution of the industry, speaking of its slow consolidation. The top 100 remodelers represented 2% of projects in 2005. By 2019, that stat had nearly doubled to just under 4%. Similarly, the top 100 builders, who accounted for a third of all projects in 2002, now account for over half the homes built. In fact, the top two builders, who represented 6% of all U.S. homes built in 2002, had captured 16% of the overall market as of 2019.

Migration

Although it is well known that the pandemic has been the impetus for a migration from higher-priced, densely populated urban centers in coastal markets to interior metros that might be slightly smaller with more breathing room, the trend actually began to take root during the four years leading up to the pandemic, with housing permits a key gauge confirming that as fact. While housing interest in most major cities declined, metros such as Atlanta, Orlando, Phoenix, Sacramento and Oklahoma City have all shown particular strength.

Future Outlook

No surprise here: the outlook, at least for the relatively near term, is bright. When asked about the likelihood they would spend at least $5,000 on their homes over the next 12 months, 40% of respondents in the New York Fed survey answered in the affirmative. This is higher than it had been in each of the past seven years. For example, in 2014, 32% had answered yes.

Of interest is that there is no distinction based on income. Those earning above $60,000 as well as those earning less are equally as likely to have near-term remodeling or renovation plans. As to how they spend their money, for 25 years it was less and less likely to be through DIY, but the pandemic sharply reversed that pattern. DIY project work had reached the low double-digits, only to jump to 25% during COVID-19. That trend has proven to be brief, as a population of aging homeowners — who prefer to hire out — along with a more diverse project mix from repair to replace, have made the DIY route less desirable. However, the wild card is Millennials, who are increasingly entering the home-buying market and are likely to be somewhat more involved in DIY than their older counterparts.