Improving Housing Trends Bode Well For Home Improvement Companies

The housing market has seen a resurgence of late. While things have not returned to the boom times, the number of new houses built last year was the most since 2007. People who buy new homes spend money on improving their homes, installing appliances, buying furnishings, etc. It is not just the new homes, but remodeling of existing houses is also on an upswing. Remodeling activity started on a strong note in 2017, with the National Association of Home Builders’ latest Remodeling Market Index edging higher than the second quarter of 2016. This increasing trend is set to continue in the future, benefiting companies like Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) who are heavily reliant on the improvement of this industry.

Baby Boomers And Millennials To Drive Growth

The growth in home prices seems to be encouraging home owners to carry out their remodeling investments. Moreover, home sales have been on an upward trajectory, indicative of a healthy sector. These two activities together evince another strong year for the home improvement industry. Homeowners who remodel this year are expected to spend about $6,148 per project, as compared to $5,800 in 2016, according to a National Association of Home Builders analysis of Census Bureau data. The average spending also varies a lot between states, ranging from $2,300 to $22,000, with owners in areas in New York and California spending the most. First time buyers, who are mostly millennials and baby boomers, are set to drive this growth in the coming years.

The Harvard Joint Center for Housing Studies (JCHS) has predicted that millennials will form “23 million new households over the next 10 years as they marry and have children.” Furthermore, the share of homeowners below the age of 35 is set to increase to 35% in 2017 from 31% last year.

The aggregate spending by those under the age of 35 remained flat during 2013 to 2015. The market share of young homeowners also fell to a 20-year low of 8.3% in 2015. However, at the same time, their per owner expenditures notched a strong 27% higher in real terms to $2,600 in 2015, from $2,060 seen in 2013. One factor contributing to the growth of this segment’s spending in the future is that, according to JCHS statistics, in 2015, households under 35 years of age were less likely to get married and have children. This trend is set to reverse in the future, with the share of younger households who are married and/or expected to have children rising by 2.1-2.4 percentage points between 2015 and 2025.

Baby boomers, on the other hand, have been leading this market for some time now, and their influence does not seem to be waning. Some factors driving this are their increased longevity, as well as their desire to live independently into their old age, which will trigger the need for remodeling projects to make their homes more accessible. The average per owner improvement spending is slated to rise by more than 10% among homeowners aged 55 and over, with the number of homeowners in this age group set to increase by twice that rate. This implies that older households will make up a larger share of the remodeling market, with their share of the spending increasing from less than 52% in 2015 to over 56% by 2025. Meanwhile, the spending by homeowners above the age of 65 is expected to account for one-third of the total in 2025, which is more than double their share in 1995-2005.

Certain Challenges Remain

While the market seems to be on a solid footing right now, there are a number of challenges that abound in this industry. For starters, it is the housing affordability. Housing prices have recovered nearly all the value lost in the downturn. This trend of rising prices affects many new homebuyers, particularly young adults. While it is often heard that the income of millennials is not rising as fast as the prices of houses, they usually tend to go for fixer-uppers, as a home in need of repair will generally sell for much cheaper than a new or refurbished home. Such a situation also gives them time, as the home improvements can be carried out over an extended period, as and when their finances allow. In about a decade from now, owners who are currently under the age of 35 years are expected to account for a quarter of the home improvement spending. What is even more striking is that they are projected to be responsible for all of the net growth that will be seen in this industry. Such a factor would make older, outdated homes more attractive, facilitating the need for greater home improvement.

Have more questions on Home Depot and Lowe’s? See the links below.

• Home Depot: Winning In The Multichannel Space
• Improved Housing Market And Higher E-Commerce Sales Result In A Stellar Quarter For Home Depot
• Lowe’s Steps Up Its Canada Operations With RONA Acquisition
• Lowe’s Posts A Top and Bottom Line Miss, But Growth Continues

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