Interest Rates Cool Pandemic-Era Remodeling Mania

While some material costs have come down a bit, homeowners who need to finance a remodel find it costs a lot more due to higher interest. As a result, fewer are doing it.

NEW YORK – Higher mortgage interest rates have slowed house sales, and higher borrowing costs could also hinder renovation.

Home remodeling and renovation expenditures helped bolster the U.S. economy after the 2020 lockdowns, with appliance, paint, lumber and others suppliers overwhelmed by the demand. Lumber prices were pushed to more than twice the old record.

Homeowners took advantage of historically low interest rates to borrow against their sharply more valuable homes to pay for their projects, but with rates now on the rise, the boom of the remodeling market may be at an end.

Home values remain high, enabling homeowners to amass greater equity, but thanks to higher interest rates, it costs more to tap into that equity through cash-out mortgage refinancings.

Eric Finnigan, vice president of research and demographics at John Burns Real Estate Consulting, says that the wealthy are unlikely to be deterred by higher financing costs, and do-it-yourselfers are likely to continue with their own small projects – but new kitchens and additions done by professional remodelers may be at risk.

“That segment of the market is really tied to how wealthy homeowners are feeling,” Finnigan says. “That’s going to contract in a pretty big way this coming year, both in the number of projects and also the amount of dollars spent per project.” According to Finnigan, cash-outs dried up this year as interest rates rose, with volume in November down 81% compared to January.

Contractors are booked solid, but the backlog of jobs is dwindling, according to consultant Craig Webb.

The Leading Indicator of Remodeling Activity found that homeowners, excluding landlords and house flippers, spent $418 billion on home improvement and repair over the 12 months that ended Sept. 30. That was up nearly 18% from a year earlier, and the model predicts a 6.5% increase over the ensuing year.

Abbe Will from the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies says that rate is more in line with the long-term growth rate and reflects rising costs for materials and labor, as well as the dampening effect of higher interest rates.

“We fully expect that to put a pinch on the market,” she says.

Source: Wall Street Journal (12/29/22) Dezember, Ryan

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