Read a graph of the NAHB/Westlake Royal Remodeling Market Index (RMI) and you’ll see that it tells a story. You will see the deep dive brought on by the uncertainty at the beginning of the COVID lockdown. The storyline continues with the post-COVID remodeling boom. More recent quarters reflect a solid market, tempered by inflation and lower household savings.
Staying Positive
That’s where things are now. The most recent edition of the RMI, released in mid-April, posted a reading of 66, down one point compared to the previous quarter. Nevertheless, the index remains positive with a reading above 50, which indicates that more remodelers view conditions as good than poor.
Before the sharp rise in inflation and subsequent increase in interest rates, the RMI saw its highest levels, peaking at 87 in the latter half of 2021 and never dropping below 73 over two years, from Q2 2020 to Q3 2022.
While the remodeling market remains strong, it’s relaxed somewhat from the highs seen from 2020 to 2022. A close look at the RMI components may explain some of this shift.
The RMI is an average of two major component indices: the Current Conditions Index and the Future Indicators Index. Drilling down, the Current Conditions Index is an average of three subcomponents: the current market for large remodeling projects ($50,000 or more), moderately sized projects ($20,000 to $49,999), and small projects (under $20,000).
While the remodeling market remains strong, it’s relaxed somewhat from the highs seen from 2020 to 2022.
An Economist's View
The large remodeling projects subcomponent is perhaps the most interesting of the three, according to NAHB Economist Eric Lynch.
“NAHB research has shown that cash has been the primary mode of financing remodeling projects over the last two years,” says Lynch. “As a result, small and even moderate-sized projects can often be done without the use of debt instruments, like a home equity line of credit, taking out a second mortgage, or a home improvement loan. For most households, the larger projects, especially those over $50,000, can only be financed with credit, and most families aren’t going to do a major remodel every five years.”
The Current Conditions Index suggests that while the remodeling market is likely to remain strong, it may be some time before it enjoys the level of market strength seen early post-COVID, Lynch says. Many households remain locked into their current home because of higher interest rates.
Under those circumstances, “remodeling became a much better option for many families,” says Lynch. “This is why RMI has performed much better than its single-family counterpart.”
That lock-in effect will likely moderate as mortgage rates gradually drift lower, he said. Another society-wide development, lower savings rates, is also likely to affect the remodeling industry.
Lynch points out that COVID allowed homeowners to increase their savings, but now, those funds are likely eaten through. This does not mean that the remodeling industry is in for a decline, especially with an overall RMI above 50. “It likely means that we’ll see more small projects and fewer large projects in the near future,” he says.