Remodeling Boom: Homeowners face rising costs and long delays

Homeowners have been spending a lot of time in their homes since the pandemic began in early 2020. After two years of using their homes more and in new ways, Americans are responding by en masse renovating their homes.

In the early months of the lockdown, Home Depot and Lowe’s reported a jump in sales as homeowners tackled smaller projects like interior wall repainting.

“Everyone said, ‘I’m tired of looking at this wall,'” says Bill Darcy, CEO of the National Kitchen & Bath Association.

As the pandemic dragged on and homeowners continued to use their homes as workplaces, classrooms, and fitness facilities, the do-it-yourself boom was followed by demand for more complicated projects. Homeowners hired contractors to remodel kitchens and bathrooms, redesign home offices, and add patios and decks.

Remodeling activity grew 13 percent from 2020 to 2021 and is on track for slower but still solid growth in 2022, according to the National Association of Home Builders. The National Kitchen & Bath Association is even more optimistic — forecasting for this year a 19 percent increase in kitchen and bathroom projects.

About 20 million American households fall into what Darcy calls the “Prime Remodeling Age” – they are 20 to 40 years old and ripe for modernization.

To pay the bill

Remodeling projects often cost $50,000 or more, and the most common way to pay the bill is with a payout refinance. Property values ​​have skyrocketed over the past two years, providing plenty of equity for many homeowners. Even if mortgage rates rise from their record lows in January 2021, a payout refinance remains a cheaper source of cash than credit card debt or a home equity loan.

This year’s increase mortgage Interest rates have slowed the pace of standard rate and term refinancing, but the restructuring boom is driving a shift toward cash-out refinancing, says Frank Nothaft, chief economist at CoreLogic.

“The refinancing that we’re seeing will be disproportionately cash-out refinancing in the coming year,” says Nothaft.

Tapping into home equity is an obvious way for homeowners to pay for improvements, says Steve Cunningham, president of Cunningham Contracting, a remodeling company in Williamsburg, Virginia. Complicated projects like adding a room to a house can run into six figures.

“When you’re that high, it’s easier to use other people’s money than your own,” he says.

American homeowners have a lot of equity. According to ATTOM, a real estate data company, 42 percent of mortgage-backed residential properties in the US were considered equity-rich in the fourth quarter, meaning the loans secured by those properties accounted for no more than 50 percent of market value.

A word of caution: Borrowing money to pay for a renovation project can tempt you to stretch the budget. “You’re probably going to spend more if you fund,” says Darcy.

Inflation is hitting the conversion market hard

The US economy is experiencing its first phase of sustained inflation since the early 1980s, with prices rising 7.5 percent in the year ending January 2022. Inflationary forces are hitting remodeling costs with a vengeance, says Paul Emrath, vice president of surveys and housing policy research at the National Association of Home Builders.

Lumber costs skyrocketed at the start of the pandemic, came back to earth last year, and then rose again. The price of gypsum, a component of wallboard, is also rising sharply. And household appliances remain in short supply.

Work is another joker. Employers of all kinds are challenged by a labor shortage, a problem that is particularly acute in the construction sector. Employers in the construction industry report 345,000 vacancies and vacancies, says Emrath.

All of these factors are causing some homeowners to abandon their remodeling projects altogether. “We’ve finally reached the tipping point where customers are saying, ‘We’re not paying. It’s just too much,” says Cunningham.

How to navigate the remodeling boom

If you decide to remodel despite rising costs, here are some words of wisdom from those working on the front lines:

  • Examine cashout refi options. Let’s say the balance on your mortgage is $100,000 and your house is worth $300,000. In this case, you have $200,000 in home equity. Lenders generally require that you hold at least 20 percent equity in your home after a payout refinance (although there are exceptions), so you must hold at least $60,000 in home equity. But you can borrow up to $240,000, using $100,000 of the proceeds to pay off the old mortgage and $140,000 for improvements.
  • Start early. Some remodeling companies say they’re so busy they’re planning projects for nine months. The combination of labor shortages and bottlenecks in the supply chain means longer deadlines. So adjust your expectations accordingly.
  • Expect rising material prices. Both Cunningham and Matt Emmons, an Oklahoma remodeling company, say they add escalation clauses to their contracts with homeowners. If the cost of materials increases by a certain amount over the course of the project — say 15 percent — the contractor will demand money from you, this legal language says.
  • Consider contributing to Sweat Equity. You’re probably not a plumber, electrician, or carpenter. But ask your contractor if there are tasks that require fewer skills that you could handle yourself. “If I could do this demolition myself and save a few thousand dollars, maybe I could afford the faucet I wanted or fund less,” says Darcy.

Learn more:

Leave a Comment