Home-Remodeling Boom Cools As Higher Loan Rates Begin to Bite

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Home-Remodeling Boom Cools
As Higher Loan Rates Begin to Bite

By Joi Preciphs
From The Wall Street Journal Online

The home-renovation boom, spurred by low mortgage rates that made home-equity loans popular and cheap, appears to be cooling off.

The latest government construction-spending data -- for November -- shows spending on home renovations was down 4.1% from the month before, and down 5.6% from November 2004.

And the latest quarterly Remodeling Activity Indicator, a measure crafted by Harvard University's Joint Center for Housing Studies to predict trends before the government releases hard numbers, suggests the pace of home-improvement spending continues to slow. "We are starting to see signs of softening in the remodeling market," said Nicolas P. Retsinas, the center's director. "Rising short-term interest rates and slowing home-price appreciation have tempered homeowner spending on home improvements."

The center's quarterly Remodeling Activity Indicator suggests spending on remodeling rose 4.3% in 2005 after a 20% spurt in 2004. Americans spent nearly $150 billion renovating their homes last year, the center estimates. The Harvard index is based on several factors -- sales by building-supply retailers; average weekly hours worked by residential remodeling firms; sales of existing homes; shipments of electrical appliances and wood products plus construction-service-firm revenues; and a measure of overall residential construction spending.

And the government said Friday that sales at building-materials and garden-supply retailers, which have been growing faster than overall retail sales, slipped by 0.6% in December while overall retail sales rose 0.7%, after adjusting for normal seasonal fluctuations. In all, building-material and garden-supply retail sales in 2005 were $332.6 billion, up 9.7% from 2004, the Commerce Department said.

"I think with the concerns people have in the long term about the economy, they are perhaps becoming a bit smarter with their money," says Josh Baker, owner of Bowa Builders, a construction company in McLean, Va., with about 80 employees. Homeowners, he says, are becoming more "pragmatic" in their remodeling decisions. The shift, he says, leans in favor of targeted investments that allow homeowners to get the most out of their properties with the expectation that they will live there for an extended period.

Although Mr. Baker says his backlog of projects continues to grow in northern Virginia, he is unsure that will continue in the greater Washington area. "I think the backlogs in general for contractors are slowing down," he says.

Housing-industry analysts say that one major generator of renovation spending has been low mortgage rates, which have prompted many homeowners to refinance their mortgages and take out cash for renovations and other spending, as well as aggressive marketing of home-equity lines. But mortgages rates are now rising. Mortgage giant Freddie Mac said last week that rates on 30-year fixed-rate mortgages are averaging 6.15%, up from 5.74% a year ago. Freddie Mac predicts they will hit 6.5% by year-end 2006. And home-equity credit lines are tied to the prime interest rate, which is now 7.25%, up from 5.25% a year ago and 4% in January 2004.

The "refinance boom is over," Frank Nothaft, chief economist at Freddie Mac, said at the National Association of Home Builders' International Builders' Show in Orlando, Fla., last week. Most of the homeowners still refinancing, he said, are those trading adjustable-rate for fixed-rate loans. A slowdown in home-price appreciation may also restrain home renovations, economists say. "You don't invest in things that aren't going to have a high return," said Lehman Brothers economist Drew Matus.

Fewer people are buying houses to renovate and profit from a quick resale, contractors say. The business instead is more concentrated among homeowners looking to "facelift" their properties, says Scott Balentine, an Overland Park, Kan., contractor, especially kitchens and bathrooms. "They want to freshen up the look of the house," says Mr. Balentine, owner of Lifestyles Custom Homes & Remodeling. Such projects generally cost between $10,000 to $40,000, he says.

Some housing analysts foresee continued strength in home-improvement spending. At the International Builders' Show, NAHB economist David Seiders said he expects "real growth in remodeling activity...because people have amassed a tremendous amount of housing equity."

Indeed, in Milwaukee, contractor Mark Brick remains ebullient. "You're seeing existing homes that are being totally renovated from top to bottom -- and they're adding on rooms on to that." says Mr. Brick, owner of B&E General Contractors Inc.

-- Kemba Dunham contributed to this article.