The ongoing surge in mortgage rates is leading to more than just a slowdown in lending, interest in remodeling and renovations is drying up as well, according to new research.
Spending on home improvement and maintenance is expected to decline 7.7% over the next 12 months, Harvard University’s Joint Center for Housing Studies found in its research of indicators of remodeling activity. It predicts a drop to $452 billion in home renovation spending over the next four quarters compared to $489 billion in the past four periods.
“While the rate of market decline should decelerate significantly in the second part of the year, 2024 is shaping up to be a challenging year for home remodeling,” said Abbe Will, associate project director of the remodeling futures program at the joint center.
The forecast also marks a 180-degree turn from the current pace of renovation growth, which resulted in a 5.4% year-over-year increase at the end of September. But the sluggish state of the housing market appears to be dampening enthusiasm for home improvement projects, researchers said.
Multiple surveys conducted in the first quarter of 2022 showed rising interest for remodeling, but a majority of households citing high home prices and limited inventory that made renovation preferable to relocating.
While housing costs and inventory constraints remain heightened today, consumers are now also contending with higher interest rates across all types of loan products, including refinances, credit cards and home equity lines of credit.
Since January 2022, mortgage rates have accelerated by more than double from near 3% to over 7.5% this October. Homeowners with sufficient cash on hand are likely to rely on those savings more frequently when opting to renovate, especially for affordable projects, a recent LendingTree survey found.
But recent regulatory changes offer potential to bring back some interest in remodel and construction projects, such as the addition or rehabilitation of existing accessory-dwelling units. The Department of Housing and Urban Development and Federal Housing Administration said this week it was revising underwriting policies to include anticipated rent proceeds when underwriting borrower income for FHA-backed renovation mortgages. Borrowers will be able to include 50% of expected rental income to qualify for such loans when adding an ADU to their property.