There’s no question that the nation has been experiencing a boom in home remodeling over the past two years. According to the Joint Center for Housing Studies of Harvard University’s Leading Indicator of Remodeling Activity, the nation has been experiencing red-hot growth in remodeling activity that is not expected to ease until the end of 2022 or beginning of 2023. Among midwesterners, more than half of homeowners report plans to take on some kind of home renovation project. This remodeling boom has been driven by a number of factors, and has continued even as inflation and supply chain shortages have driven construction costs to unprecedented levels. And although the unprecedented pace of renovations is expected to slow, renovations are expected to remain popular among homeowners.
With this trend continuing, what do homeowners and buyers need to know about the renovation boom and its effects on the Chicagoland housing market?
Why Are Homeowners Remodeling?
The trend in renovations has been driven by a number of factors. There has been a significant slowdown in new construction homes occasioned by pandemic interruptions and supply chain factors, so many buyers are buying older homes that may need work. This aging inventory, combined with increasingly extreme weather conditions has caused many homeowners to renovate to protect and adapt their older homes to the elements.
First-time millennial homebuyers, some of whom are entering a tight housing market for the first time and investing in less pricey fixer-upper homes, are another key driver of renovations. Particularly during the pandemic, as the young families of millennial homebuyers were using their homes in new and different ways and spending more time at home, these homeowners began to demand more functionality for homes that had to double as schools, workplaces, and entertainment centers. Millennial homeowners tend to renovate more than other generations, and when they do renovate, tend to spend more on their renovations — around $40,000, compared to around $10,000 – $11,000 for older generations.
Newer homeowners, including millennials, are also more likely to spend more on renovations. According to a survey by Realtor Magazine, “recent home buyers spent nearly double the national median ($30,000), according to the survey. Long-term homeowners—those who moved into their home six or more years ago–spent a median of $15,000.”
Another critical factor in the renovation boom has been recent increases in home values. Many homeowners have seen the value of their homes skyrocket in recent years. Homeowners who need to finance renovations have been able to use cash-out refinances to fund improvements to their homes, thereby adding even more equity value to their properties.
How Is The Remodeling Boom Affecting The Housing Market?
There is no question that the remodeling boom has increased home values, combining with a red-hot Chicagoland real estate market, a slowed pace of new construction, and inflationary pressures to increase the prices of Chicagoland homes. While this is great news for homeowners, it does add to pressure on buyers, who are now facing decreased purchasing power as a result of the combination of rising interest rates and rising home prices.
Adding to the pressures facing buyers, homeowners who have recently spent significant sums renovating their homes to suit their tastes and needs may not be as eager to sell their homes. Homeowners who financed their remodeling projects through cash-out refinances at lower interest rates may feel that a planned move can or should wait as interest rates rise. These trends further tighten supply and can make it tough for buyers to enter the market.
However, for homebuyers who are seeking updated homes, the renovation boom might provide some unexpected windfalls. Many popular renovation projects don’t necessarily offer a 100% return on investment for homeowners who undertake them. For example, homeowners who invest in a full kitchen remodel should only expect to see between 52% and 59% of their investment reflected in the sale price. Homebuyers can, then, see a discount if they can find a home that has been renovated.
What’s more, for homebuyers concerned about increasingly extreme weather conditions and their long-term effect on home values, the trend of weatherizing older homes is a benefit to buyers. Even if a buyer has to wait for that new kitchen or bathroom, knowing the home they’re buying is safe in a storm can bring important peace of mind.
What’s Next For The Renovation Boom?
Inflation tends to have a disproportionate effect on the remodeling market, which may see prices rise faster than the rest of the economy. And as interest rates rise, cash-out refinances tend to slow somewhat. For these reasons, experts expect a cooling, but not a decline, in the recent sweltering pace of renovations. According to the Harvard Joint Center for Housing Studies:
“The level of annual expenditures for home improvements and repairs is set to expand to nearly $450 billion by the first quarter of 2023,” says Abbe Will, Associate Project Director of the Remodeling Futures Program. “Yet, the rising costs of project financing, construction materials, and labor, as well as growing concerns about a broader economic slowdown or recession may further slow remodeling growth.”
For homeowners contemplating a renovation, this means continued long construction delays and relatively high costs. Homeowners should plan carefully and allow for extra time on planned construction projects. For homeowners who are able, investing “sweat equity” into home remodeling projects can lead to higher returns on investment. Projects like painting, upgrading landscaping, and improving fixtures can all lead to higher homeowner satisfaction without requiring major construction or demolition.
When Home Means More, You Need a Team With More to Offer
Are you a homeowner considering whether to sell your renovated home? A new buyer thinking about the real costs of a fixer-upper that needs renovations? The renovation boom is here to stay, and navigating the market has never been more complicated. No matter what, your local Baird & Warner agent is with you at every step of the way, with the tools and support you need to make your real estate journey easier.