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Remodeling Soars - But The Industry Still Struggles

Updated: 2 days ago

Split image of a remodeled kitchen with before on the left and after on the right.

In the wake of the pandemic, the US remodeling market has grown an astounding $600 billion, remaining 50% above pre-pandemic levels despite a recent softening, according to a report by the Joint Center for Housing Studies of Harvard University.


According to the report, inflation, a shortage of skilled labor, and industry fragmentation hinder the industry's ability to meet demand. Here's how:


Inflation


Anyone in the middle of a remodel has likely heard from their contractor that they would be wise to purchase all of their lumber sooner rather than wait even another week to do so. In August 2024, tariffs on soft lumber increased over 6% from 8.05% to 14.54%. Now, the Trump administration is proposing a 25% tariff on lumber from Canada (our largest importer) in April, which would substantially increase the costs to the consumer.


The National Association of Home Builders says it has received anecdotal reports that its members are planning for tariffs on lumber and gypsum — which home builders source from Mexico and use in drywall — to increase material costs between $7,500 and $10,000 on the average single-family home.


Over the past five years, material costs for construction have increased by 40 percent nationwide, and for much of the last year, shelter inflation - rent and homeownership costs - has been responsible for most of the increase in consumer inflation.


Inflation is one of the main reasons for the affordable housing crisis in Virginia and nationwide. Investors who purchase homes and buildings to flip or rent are finding purchasing fixer-uppers and then renting them or reselling them less attractive. They see that while high building costs can likely be offset by raising rents and setting higher home sale prices, that is less feasible in rural areas where people’s incomes won’t match up with more expensive rents. Relying on higher rents and sale prices to offset construction costs threatens the development of badly needed affordable housing, where profit margins are even slimmer. And, individual homebuyers are finding they cannot afford to fix up a property themselves.


Skilled Labor Shortage


The Homebuilders Institute published a report in April on the construction labor market, highlighting changes in residential construction employment. The report states that there are currently 8.2 million payroll construction workers, of which 3.4 million are in residential construction.


While the median age of construction workers is 42, due to aging trends, the share of construction workers ages 25 to 54 decreased from 72% in 2015 to 67.3% in 2022. Younger workers are looking at construction careers, but not at a level sufficient to fill the 400,000 open construction sector jobs.


Industry Fragmentation


Industry fragmentation occurs when there is no clear leader within an industry, and many small or medium-sized businesses compete for market share. The term fragmentation refers to a supply chain that is broken up into different parts.

Fragmentation means that no company has enough influence to affect prices, production, investment, and competition in the industry. Common fragmented industries include distribution and wood and metal fabrication. Construction is a fragmented market because small businesses can enter the industry easily.


Fragmentation hurts the construction industry as it limits collaboration and innovation. In 2019, spending on construction projects in the US totaled more than $1.4 trillion, with about 30% going to waste due to delays, duplicative work, unplanned changes, and loss of materials - the result of fragmentation.


Takeaways on The Construction Industry's Inability to Meet Renovation Demands


While inflation, fragmentation, and labor shortages are hampering industry efforts, the Harvard report offers three other reasons why it can't keep up.


The Pandemic Fueled Unprecedented Spending


Repair and home improvement spending exploded from $404 billion in 2019 to over $611 billion in 2022. It is expected to remain above $600 billion through 2025. Homeowners spent $4,700 on improvements in 2023 - 9% above the market boom in 2007.


Climate Change is Driving Improvement Spending


Increasingly frequent and intense catastrophic events such as hurricanes, tornados, floods, and straight-line storms raised disaster repair spending to $49 billion in 2022-2023, up from just $16 billion in 2002-2003. Homeowners also spent $139 billion on improvements to energy efficiency and another $350 billion to protect against climate change risks, such as replacing roofs and siding, removing hazards, and improving drainage—four times the amount in 2003.


The Housing Stock is Aging


The median age of housing in 2023 was 44 years, with more than 50% of houses in the U.S. built before 1980. This means many critical improvements are needed to replace aging components. The average improvement spending for homes built before 1980 is 24% higher than for homes built since 2010.


Changing Demographics Means More Personalization and Improvement to the Current Housing Stock


Owners aged 65 and older contributed 27% of total improvement outlays in 2023 and owned nearly 40% of the home inventory. This is a 14% increase over 2003. In addition, minority ownership accounted for 23% of improvement expenditures, with immigrant owners accounting for 13% of that figure.


 

Given the growing need for residential remodeling and its projected continuation, changes in the current climate of higher costs and scarce labor will continue. Efforts by organizations such as Mike Rowe's Warrior Pathway Program (designed to offer scholarships to young people looking to learn a trade) and the Labor Department's Employment and Training Association are addressing the shortage the number of skilled laborers. And, associations such as the Homebuilders Institute, along with several digital process management companies, are partnering to develop tools to help improve communications between contractors, enabling a streamlined process with fewer disruptions.


 

Sources: Berkshire Eagle, Harvard Joint Center for Housing Studies, Homebuilders Institute, Construction News, Statista, ConstructionManagement.co.uk

 
 

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