When developers and homeowners can’t invest by increasing the number of housing units offered, they turn to other opportunities to increase the value of their homes, namely through renovations and other improvements. A new report from the Joint Center for Housing Studies at Harvard University documents the increase in spending on home improvements:
The U.S. market for home improvement and repair is now well over $400 billion annually as the housing stock faces pressure to meet the nation’s growing and changing housing needs. Years of rising costs of new construction mean a growing number of vacant and rental units are now filling demand for homeownership, and these converted units often require substantial investments in renovation and repair. This and other key trends in the remodeling industry are highlighted in the 20th anniversary Improving America’s Housing report.
Improvements to housing now make up a majority of residential housing investments, and this increase has been driven by rising home prices. And, while a majority of these housing improvements are financed by savings (as measured by the amount of money used to finance the project), the share of home equity used to finance these investments increases with improvement size.
The most revelatory finding from the study for those concerned about inequality and demography can be found in this quote describing the demographic disparity between home improvements by age:
Older homeowners have come to dominate the remodeling market in part because homeownership rates among younger households have languished in the years since the housing crash. The affordability barriers for first-time buyers are formidable, with prices of entry-level homes rising sharply and mortgage interest rates up from historical lows. Years of weak income growth and the burden of large student loans have also prevented many younger households from saving for a downpayment or being able to afford the monthly costs of homeownership.
It’s worth pointing out that many of the causes of this growth in home improvement aren’t related to the problem of artificially low supply growth, such as improvements in energy efficiency ($68 billion), disaster repairs ($27 billion), and consumer preferences to upgrade their living situation.
There’s nothing wrong with a homeowner making improvements to their living situation (who doesn’t want to live in a nicer house?) But it would be preferable for housing prices to decrease thanks to investment in new housing, rather than the quality of homes to improve with financing help from increasing home values.