Issues Shaping the Outlook for the Remodeling Industry

Issues Shaping the Outlook for the Remodeling Industry Kermit Baker Remodeling Futures Program Joint Center for Housing Studies NARI Fall 2017 Leadership Summit September 8, 2017

Home Remodeling Spending Totaled $340 Billion in 2015 According to JCHS Benchmark Estimate Billions of dollars 400 350 300 250 200 150 232 217 25 23 25 32 34 37 289 18 31 43 318 20 33 46 277 284 21 21 34 31 47 50 304 22 32 52 340 24 38 57 100 50 135 138 197 220 175 182 198 221 0 2001 2003 2005 2007 2009 2011 2013 2015 Owner Improvements Owner Maintenance Rental Improvements Rental Maintenance Sources: JCHS analysis of US Department of Housing and Urban Development (HUD), American Housing Surveys; US Department of Commerce, Retail Sales of Building Materials and Survey of Expenditures for Residential Improvement and Repairs (C-50); and JCHS Research Notes, October 2010 and April 2016. 2

More Than One in Five Construction Dollars Spent on Home Improvements Share of total U.S. construction market, 2015 Public works/infra. 19.6% Home improvements 21.3% Institutional bldgs. 18.3% S-F new 18.2% Comm./indus. bldgs. 18.3% MF new 4.3% Total 2015 Construction Spending = $1.2 Trillion Source: JCHS and U.S. Census Bureau Construction Spending Put in Place. 3

Home Improvement & Repair Spending Has Seen Steady Mid Single-Digit Growth in Recent Years National home improvement and repair market size estimates $400 $350 $300 $327.2 $318.4 $302.0 Spending in billions (left axis) Annual % change (right axis) $276.9 $283.8 $287.3 $274.6 $304.0 $325.1 $340.8 $360.7 25% 20% 15% $250 13.3% 10% $200 $150 $100 $50-2.7% -5.1% -8.3% -0.9% 3.3% 1.2% 5.8% 6.9% 4.8% 5.8% 5% 0% -5% -10% $0-15% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (e) Notes: Historical data through 2015 are JCHS estimates based on the American Housing Survey and Census C-50 series. Estimates since 2015 are produced using the Leading Indicator of Remodeling Activity model until new AHS data become available. Source: JCHS tabulations of HUD, American Housing Surveys; US Department of Commerce, Retail Sales of Building Materials; Census Bureau, C-50; and JCHS Research Notes, October 2010 and April 2016. 4

Discretionary Projects Account for Large Share of Owner Improvement Spending Share of total improvement spending, 2015 Disater Repairs 5.0% Outside Property 12.8% Kitchen & Bath Remodels 19.7% Interior Replac. 9.7% Room Additions 7.4% Outside Attachments 5.6% Exterior Replac. 22.3% Systems & Equipment 17.6% Source: JCHS tabulations of HUD, American Housing Survey. Homeowner improvements = $221.1 Billion 5

Home Improvement & Repair Spending Projected to See Another Year of Healthy Growth National home improvement and repair market size estimates $450 $400 $350 $300 $327.2 $318.4 $302.0 Spending in billions (left axis) Annual % change (right axis) $325.1 $304.0 $276.9 $283.8 $287.3 $274.6 $340.8 $360.7 $381.4 $402.9 30% 25% 20% 15% $250 13.3% 10% $200 $150 $100 $50-2.7% -5.1% -8.3% -0.9% 3.3% 1.2% 5.8% 6.9% 4.8% 5.8% 5.7% 5.6% 5% 0% -5% -10% $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (e) 2017 (f) 2018 (f) -15% Notes: Historical data through 2015 are JCHS estimates based on the American Housing Survey and Census C-50 series. Estimates and forecasts since 2015 are produced using the Leading Indicator of Remodeling Activity model until new AHS data become available. 2018 forecast is through Q2. Source: JCHS tabulations of HUD, American Housing Surveys; US Department of Commerce, Retail Sales of Building Materials; Census Bureau, C-50; and JCHS Research Notes, October 2010 and April 2016. 6

Home Improvement Industry Trends and Issues Demographic tends drive home improvement outlook. Housing affordability key to future remodeling activity. Home improvement spending growth over the coming year expected to be the greatest in more affordable metros. Rebuilding the construction labor force will be challenging, given the fragmented structure of the industry. New growth opportunities for the industry emerging. 7

Outlays for Home Renovations Increase Sharply After Owners Reach Their Mid-30s Average annual per owner improvement spending, 2011 2015 (2015 dollars) 3,500 3,000 3,060 3,030 3,000 2,720 2,500 2,000 2,340 2,200 1,500 1,000 500 0 Under 35 35 44 45 54 55 64 65 and Over All Age of Homeowner Source: JCHS tabulations of HUD, American Housing Surveys. 8

Over Coming Decade, Household Growth Heavily Dominated by Age 65+ Population 30 25 20 Households (Millions) 27.6 26.4 21.4 23.9 23.7 23.5 22.1 23.7 16.9 2015 2025 22.3 18.9 15 13.0 10 5 0 under 35 35-44 45-54 55-64 65-74 75+ Age Group Source: JCHS 2016 Household Projections. 9

House Prices Have Fully Recovered From Downturn Discounting Inflation Effects Nominal Index Value (Dec. 2000=100) 180 170 160 150 140 130 120 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Notes: Monthly data through May, 2017. Source: S&P CoreLogic Case-Shiller U.S. National Home Price SA Index (re-indexed to Dec. 2000).

House Price-to-Income Ratios Exceed Historical Averages in Most Large Metro Areas Ratio of single-family existing house prices to household income for U.S. and top 15 U.S. metro areas 10 8 Historic Average (1985-2016) Current 6 4 2 0 Notes: Index compares the median price of homes to the median level of household income in a given area.. Source: Zillow Price-to-Income Ratio, calculated as part of Zillow s quarterly Affordability Indices; current data for Q1-2017.

Younger Households Disproportionally Buying Homes In More Affordable Markets Homeownership Rate Among Households Under Age 35 in 2015 Average for top 50 metros = 31.3% Note: Data includes largest 50 metro areas ranked by population. Source: JCHS tabulations of US Census Bureau, American Community Survey (ACS).

Younger Owners in More Affordable Markets Generally Reinvest Higher Share of Home Value in Improvements Under age 35 improvement spending as a share of home values, 2015 (Percent) Percent Less than 1.3% Metro Average: 1.8% 1.3% to 1.8% 1.8% and higher Source: JCHS tabulations of HUD, American Housing Survey. 14

Homeowners in High Value Coastal Markets Traditionally have Spent the Most on Remodeling Note: The average per owner spending for the 25 metros was $3,400 in 2015. 16

However, More Affordable Areas Are Projected to Post the Strongest Growth Over Coming Year Projected annual change in real improvement spending, 2018:Q2 (Percent) Notes: Data include the largest 50 metro areas ranked by population in 2015. Spending projections are calculated as the average of annual rates of change in sales of existing single-family homes (as of 2017:1) and starts of privately owned single-family homes (as of 2017:2). The average projected annual change in real improvement spending for the 50 metros is 5.6%. Source: JCHS tabulations of US Census Bureau, American Community Survey; and Moody s Analytics estimates. 17

Top 10 Metros for Growth Over Coming Year Concentrated Among Affordable Markets Projected annual change in real improvement spending, 2018:Q2 (Percent) Projected Growth: 10.0% or More Notes: Data include the largest 50 metro areas ranked by population in 2015. Spending projections are calculated as the average of annual rates of change in sales of existing single-family homes (as of 2017:1) and starts of privately owned single-family homes (as of 2017:2). The average projected annual change in real improvement spending for the 50 metros is 5.6%. Source: JCHS tabulations of US Census Bureau, American Community Survey; and Moody s Analytics estimates. 18

Midwest Has Highest Share of Metro Areas With Projected Strong Growth This Year Number of top 50 regional metro markets by projected growth in home improvement spending in 2018 (Annual estimate through Q2) Strong (10%+) Average (3% to 9%) Slow (Under 3%) Overall 2018 Trend Northeast 0 2 5 Weak Midwest 5 5 0 Strong South 5 10 6 Balanced West 3 6 3 Balanced Source: JCHS tabulations of US Census Bureau, American Community Survey; and Moody s Analytics estimates.

Construction Not a Popular Career Path at Present for Young Adults Career plans by industry, 18-25 years olds, % Medical, 16% Other, 29% Business, 12% Construction, 3% Media, 4% Law, 4% Marketing, 4% Teaching, 6% Science, 6% IT, 9% Engineering, 7% Source: NAHB Young Adults and the Construction Trades March, 2017.

Groups Projected to Increase the Most are Less Likely to Pursue a Career in Construction Career plans by industry, 18-25 years olds, % 6% 5% 5% 4% 4% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 1% 0% Source: NAHB Young Adults and the Construction Trades March, 2017.

The Number of Remodeling Businesses Continued to Expand During the Downturn Residential remodeling establishments (Thousands) 800 700 652.2 716.0 600 500 400 300 200 100 0 530.2 202.9 127.2 278.1 156.7 308.4 182.7 117.2 139.5 144.6 82.9 77.9 80.3 2002 2007 2012 General Contractors with Payrolls Specialty Trade Contractors with Payrolls Self-Employed General Contractors Self-Employed Specialty Trade Contractors Notes: Data include establishments with more than 50% of receipts from remodeling (including maintenance and repair) and self-employed remodeling contractors with annual revenues of at least $25,000. Source: JCHS estimates based on unpublished tabulations of US Census Bureau, Economic Censuses of Construction and Nonemployer Statistics. 23

Large Residential Remodelers Were Much More Likely to Weather the Downturn Remodeling general contractor payroll establishments (000s) 120 100 99.4 Establishments in 2007 Establishments from 2007 Still Operating in 2012 80 60 48.7 50.4 40 33.8 20 19.0 19.3 15.2 10.4 0 All Remodeling GC's Under $250,000 $250,000 999,999 $1 Million and Over 2007 Annual Receipts Source: US Census Bureau, Business Information Tracking Series. 24

Design/Build Firms in Top 500 Have Seen Strongest Revenue Growth Over Past Two Years Median annual rate of change in remodeling revenue by business type 14% 12% 12.2% 2015 2016 10% 8% 8.4% 9.1% 7.9% 7.4% 7.4% 8.0% 9.8% 6.7% 7.4% 9.1% 6% 4% 3.2% 2% 0% Design/Build Full-Service Exterior Kitchen & Bath Insurance Restor All Note: Analysis includes remodelers reporting revenue in two consecutive years and ranking in the top 400 in at least one of those years. Source: JCHS tabulations of Qualified Remodeler publication s Top 500 Remodelers.

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Typical Job Size Volatile for Design/Build and Full-Service Firms; More Stable for Others Median average job size (Thousands of $) $50 $40 Full-Service Exterior Kitchen & Bath Insurance Restoration Design/Build (right axis) $100 $80 $30 $60 $20 $40 $10 $20 $0 $0 Source: JCHS tabulations of Qualified Remodeler publication s Top 500 Remodelers.

Growth Opportunities for the Home Improvement Industry Improvements to the rental housing stock; Energy efficiency upgrades; Older homeowners and accessibility retrofits; and Home automation and the connected home. 28

A Large Share of Rental Units are Single-Family Homes; Most are in Smaller Properties Distribution of Rental Properties by Number of Units, 2015 (Percent) 100 to 149 units 4.0% 50 to 99 units 6.8% 150 units or more 15.9% 1 unit 40.6% 25 to 49 units 8.6% 5 to 24 units 10.4% 2 to 4 units 13.7% Source: JCHS tabulations of US Census Bureau, 2015 Rental Housing Finance Survey. 29

Spending for Capital Investments and Repairs to Apartments Has Been Picking Up Average per unit spending for professionally managed rental properties (2015 dollars) $1,400 $1,200 $1,000 $800 $600 $400 430 1,290 1,140 980 810 800 650 480 490 490 510 520 1,090 980 900 470 450 430 490 1,180 $200 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Maintenance and Repairs Capital Improvements Notes: Sample includes rental properties with 50 or more units and stabilized operations. Dollar values are adjusted for inflation by the CPI-U for All Items. Source: National Apartment Association, Survey of Operating Income and Expenses, 2007-2016. 30

Homes Have Seen Improvement in Most Energy- Related Features, But Levels Still Unexpectedly Low Share of single-family homes (Percent) Older Homes (Built before 1980) Newer Homes (1980-2009) New Construction (Built after 2009) Year of survey: 2009 2015 2009 2015 2015 Poorly insulated 20 17 8 6 1 Main heating equip. 20+ yrs. old* Double or triple pane windows 26 21 - - - 60 64 78 78 89 Main water heater is tankless* 3 4 4 4 5 Smart thermostat - 4-6 5 Solar energy generated on site** 1.5 1.9 1.7 2.2 5.7 Notes: Analysis includes single-family detached owner-occupied homes only. *Shares calculated only among homes for which question was applicable. **In 2009, the question only tracked whether solar energy was used. In 2015 the survey further specified whether this was generated on-site (solar PV). Source: JCHS tabulations of EIA, Residential Energy Consumption Surveys, 2009 and 2015. 31

Millions While Our Older Population Will Grow Dramatically, Most Will Live in Their Own Homes Age 65 and over householder and non-householder population by living situation 40 30 38.1 2015* 2035 23.5 20 10 0 6.4 11.5 4.9 10.2 Owner household Renter household Living in other's home (relative or nonrelative) 1.5 2.8 Living in group quarters *Owner and renter household data is for 2015 while non-householder living situation data is for 2014. Source: 2016 JCHS Household and Tenure Projections, JCHS tabulations of 2014 American Community Survey and 2014 US Census Bureau Population Projections. 32

Few Owners Reporting Home Improvements for Accessibility Reasons Share of owners reporting improvements for accessibility reasons, 2014-2015 8% 6% 5.9% 4% 4.0% 3.1% 4.6% 2% 1.7% 2.3% 0% All Owners Under 35 35-44 45-54 55-64 65 or older Householder Age Source: JCHS tabulations of HUD, 2015 American Housing Survey.

Home Automation Is Emerging as a Strong Growth Opportunity for Remodelers Share of contractors reporting a recent increase in revenue from specialty segment (Percent) 50% 40% 41.2% 33.8% 30% 28.4% 28.4% 22.5% 20% 17.2% 10% 0% Aging-in- Place Energy Efficiency Home Automation Outdoor Living Healthy Home Home Security Source: JCHS/The Farnsworth Group Survey of Remodeling Contractors, October 2016. 34

Summing Up Home improvement spending, approaching $400 billion a year, is at record levels. Demographics and housing affordability are key industry concerns. Labor force issues will continue to be a major obstacle; Home improvement growth opportunities include: Improvements to the rental stock; Energy efficiency upgrades; Accessibility retrofits; and Home automation. 35