Few Surprises in Harvard Study on Building Cycles
Cambridge, MA, Sept. 22, 2008--The Harvard Joint Center for Housing Studies recently released a report on residential building cycles and the correlation between home construction and remodeling.
Understanding Remodeling Cycles by Abbe Will examines patterns of activity in homebuilding and remodeling, comparing them with overall economic activity over a 20 year period stretching from the first quarter of 1985 to the fourth quarter of 2007.
The housing industry is a major component of the U.S. economy; residential fixed investment totaled $641 billion in 2007. Investment in new construction and residential improvements made up about 5 percent of gross domestic product (GDP) and 30 percent of private domestic investment on average since 1950.
It is generally accepted that housing and the GDP tend to expand and contract during the same time periods and there is evidence that residential investment was the largest contributor to weakness in the GDP prior to eight of the past ten recessions.
These cycles, however, are not regular and predictable. Reductions in spending for residential construction vary widely in both size and duration but generally lead a slowdown in spending on consumer durables.
Will notes that it is easy enough to see when the housing market is expanding or perhaps even overheating as home prices rise, the supply of homes shrinks, and homebuyers may find themselves in competitive bidding situations.
It is harder to anticipate when the market will cool and whether the bubble will burst or gently deflate.
The study also seeks to deconstruct remodeling spending into components such as professional vs. do-it-yourself projects or improvement v. maintenance spending in order to identify the underlying drivers of patterns in the industry.
In deconstructing remodeling by project type, Will found that better than one-quarter (27.3 percent) of expenditures were made for interior and exterior replacements defined as roofing, siding, window and door installation, flooring and ceiling projects.
This category was followed (at 22.0 percent) by room additions and alterations including decks and porches as well as miscellaneous interior improvements. Kitchens and baths represent 18.6 percent and improvements including adding or replacing a garage, fencing, septic systems claim 16.4 percent of the home improvement dollar.� Smaller amounts of money are spent on replacement of existing improvements such as plumbing repairs, electrical, HVAC and appliance expenses and for disaster recovery (10.4 and 5.3 percent respectively.)
Will says that, with so much segmentation the various components behave differently during the cycle. Improvements, for example, are usually more discretionary than routine maintenance and repairs so the former is expected to be much more cyclical and sensitive to outside economic forces than the latter which is expected to be more stable.
According to the author, there were several unique factors that led to the size and length of the current cycle. The strong housing market and attendant appreciation in home prices contributed to a growing pool of home equity which, coupled with low interest rates and easy access to credit, led homeowners to cash out funds for home improvements.
The radical changes in two of these factors - falling house prices and tightening credit - are now forcing homeowners to retrench, curbing home improvement spending, and there is no indication that the current cycle is nearing the bottom.
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