The U.S. home improvement industry is poised for continued expansion. To realize this growth, however, contractors will have to respond strategically to several emerging trends--the increasing importance of the high-end market, the evolving structure of the industry, and the changing demographic environment.
Earlier in this decade, much of the growth in home improvement spending was prompted by a unique combination of rapidly rising house prices, historically low financing costs, and limited investment alternatives. These forces encouraged many homeowners to refinance their mortgages and to use the savings--as well as cashed-out equity--to reinvest in their homes by making high-end improvements. Continued low financing costs, growth of high-income households, and rising house values have all helped to keep the market for high-end projects growing.
For several decades, the baby boomers have been the backbone of the remodeling market. This generation, now in their 40s and 50s, is aging beyond the prime remodeling years. Coming behind them are the members of so-called Generation X, who are fewer in number and more unknown in terms of their home improvement behavior. Complicating the outlook is the fact that minority and immigrant households--groups with potentially different home improvement goals--make up a large share of this generation. The challenge to the industry is thus to keep the aging baby boomers involved in making home improvements while at the same time finding ways to appeal to younger, more diverse homeowners.
Although the home improvement industry is emerging as one of the major forces in the economy, its organizational structure is locked in the past. This is particularly true of remodeling contractors, who largely lack the efficiencies gained through consolidation. With the home builder industry rapidly consolidating, building product suppliers are beginning to focus more on that industry segment. To achieve its growth potential, the remodeling segment must therefore ensure that manufacturers and distributors of home improvement products, as well as firms providing financing to this industry, continue to serve its contractor base.
The key threats to continued growth, however, are a sharp drop in home prices or a spike in mortgage interest rates. A rapid home price decline could prevent homeowners from tapping their equity to fund high-end home improvement projects. And even if home prices do not fall, rising interest rates could dampen the pace of home sales, thereby reducing the home improvement spending generated by housing turnover.
Nevertheless, income growth at the high end of the distribution has kept pace with rising home prices in most metropolitan areas, leaving room for continued strong spending gains. Without an unexpectedly large run-up in mortgage rates or an unanticipated shock to the economy, the remodeling sector should be able to sustain the 3 percent annual inflation-adjusted growth it has averaged since 1995.