Real Estate

New kitchen? New bathroom? Why the time is now

Remodeling resurgence?

Now that U.S. homeowners are feeling better about the value of their property, they seem more apt to add to that value. Growth in annual spending on home remodeling is expected to surge from 2.4 percent in the second quarter to 6.8 percent in the second quarter of 2016, according to Harvard's Joint Center for Housing Studies.

"Home improvement spending continues to benefit from the last years' upswing in housing market conditions including new construction, price gains and sales," said Chris Herbert, managing director of the Joint Center. "Strengthening housing market conditions are encouraging owners to invest in more discretionary home improvements, such as kitchen and bath remodeling and room additions, in addition to the necessary replacements of worn components such as roofing and siding."

A construction worker remodels a home in Cambridge, Massachusetts.
Suzanne Kreiter | The Boston Globe | Getty Images

The projection is bolstered by a surge in cash-out refinances this summer, up 68 percent in the second quarter of this year from a year ago, according to Black Knight Financial Services. That is the highest level in five years. Much of the money is going back into homes in the form of renovations.

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Contractors, such as Matt Proper of Freeman Builders in Washington, D.C., say they are booked through the winter.

"I assume it is because of low interest rates; people are scared that interest rates are going to go up, so they're trying to do more remodeling now since the money is easier," said Proper.

More than two-thirds of home renovation firms reported 2015 year-to-date revenues and profits to be at or above pre-recession levels, with one in five firms or more reporting revenues and profits to be significantly higher, according to a recent report from Houzz, a remodeling website.

"While industry confidence remains strong for the remainder of 2015, professionals tell us that the shortage of skilled labor continues to be a key challenge to growth," Nino Sitchinava, principal economist at Houzz.

Spending in the repair and remodeling industry is expected to grow to $300.5 billion in 2016, according to John Burns Real Estate Consulting. The bulk will be in small, discretionary projects, like kitchens and bathrooms. Researchers at JBRC are projecting home price appreciation to be 4.2 percent next year, and they estimate that each 1 percent of real appreciation drives 1 percent incremental higher average project size for both big and small projects, as well as a 1 percent increase in average small project spend per remodel.

The beneficiaries of this new boom will undoubtedly be material retailers and manufacturers. In its second-quarter earnings report, Home Depot raised its 2015 profit outlook for the second time this year. Manufacturers such as Masco, Whirlpool and Sherwin-Williams are all seeing earnings growth thanks to renewed confidence and investment in housing.