Home investment heats up, consumers lay down cash

Consumers may not be freely spending money on non-tangibles, but 2013 marked a turnaround year for investments in the old homestead, with an uptick in renovations that some economists say has been precipitated by the rise in U.S. home prices.

The tell-tale signs of consumer spending in the home renovation projects can be seen in the do-it-yourself big box retail sector with Home Depot. Fitch Ratings recently issued a note on Home Depot and the home renovation sector indicating a projected 5% growth in home improvement activity that has already taken place this year. Fitch expects home improvement spending will increase another 6% in 2014.

“The continued improvement in the housing market, as well as strong home price appreciation seen so far this year, are likely to drive higher spending on home renovation projects in 2014,” Fitch noted.

Steve Abshier, president of Abshier Construction in Rogers, said the back half of 2013 has been busy and he continues to get calls nearly every day for room additions as well as kitchen and bath upgrades.

“Most of my clients want to add square footage. I had a call today from a lady who is retiring and wants to add 600 square feet to her home. Right now I am finishing up another master bedroom suite addition,” Abshier said.

He said the jobs range from the low six-figures down to $400 and there is really no common patterns about what people are wanting. But the majority of his customers have paid in cash, with just one or two this year using home equity lines of credit.

Economists note that near 0% interest rates and record high stock valuations have consumers sitting on mounds of cash which they have steadily been pumping back into their homes nearly all year long. Fitch said retailers like Home Depot have benefited from that cash spend posting strong comparable sales growth since the spring, up 10.7% in the second quarter and 7.4% higher in the third quarter. Meanwhile Fitch expects comp sales to grow in the low mid-single digits over the next two years.

FINANCE OPTION
As real estate values continue to rise, homeowners will have more opportunity to secure home equity lines of credit. Median home sale prices across Northwest Arkansas have risen 24% in the past two years, according to MountData.com.

“We’ve begun to see demand grow at a modest but increasing rate for home equity lines of credit over the last year," said Thomas Hay, loan product manager at BOK Financial, parent company of the Bank of Arkansas.

He said approximately half of the demand for equity products is related to home improvement.

“Often, our clients use their home equity lines of credit for multiple improvement projects over the course of time. Common projects are the build out of a swimming pool, refinish an attic space, or upgrades to kitchens or master baths,” he added.

A large survey of homeowners done earlier this year by Houzz.com found that the average bathroom remodels cost $10,442, while kitchen makeovers tallied $28,030.

Hay said as home equity rises, the amount which can borrowed also improves. Most home equity lines of credit are based on 80% loan-to-value ratio. For example, a consumer who owns a home valued $200,000 and owes $100,000 would have a 50% loan-to-value ratio. Under a contract with a maximum loan-to-value of 80%, this particular client would be eligible to borrow up to $60,000 to improve their home.

HOMEOWNER MOTIVATION 
Abshier said most of the customers he has completed projects for in the past year where planning to stay put.

“They needed more space or wanted updates for their own comfort level,” he said.

The Houzz.com survey indicated the motivation behind renovation and redecorating projects is still about improving the look, feel, flow or layout of the home. However, more people said this year they were also investing to increase the home’s value versus last year.

Roughly 40% of 100,000 homeowners surveyed said they plan to remodel or add an addition in the next two years, and 84% said they planned to redecorate by 2015. The survey found that 53% thought the time was right for starting a home renovation.

POTENTIAL HEADWINDS
Fitch notes several challenges that could still derail the sustained rebound in home remodel spending in 2014.
• Lingering high unemployment

• Tighter consumer credit standards
, and
• Rising interest rates


Spending for big-ticket remodeling projects will continue to lag the overall growth in the home improvement sector somewhat, as credit availability remains relatively constrained and homeowners remain cautious in their spending, according to Fitch. However, there are signs that homeowners are somewhat more willing to undertake larger discretionary projects and purchases.