home renovation, economy, residential, renovating a home Close-up photo of an individual painting a bright blue wall over with white paint. Close-up photo of an individual painting a bright blue wall over with white paint. Close-up photo of an individual painting a bright blue wall over with white paint. Close-up photo of an individual painting a bright blue wall over with white paint.
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Home-improvement projects give economy a boost

The following article is part of Money Matters, a series that explores financial and economic trends, and how they impact people, brought to you by Chase Home Lending.

Two Halves Make a Home

The 2008 recession was sparked by a real estate collapse and residential construction has yet to fully recover. Despite steady population growth, new housing construction remains well below pre-recession levels. In the first quarter of 2017, seasonally adjusted real housing investment reached only $615 billion, compared to a pre-recession high of more than $881 billion in 2005.

Meanwhile, the broader residential sector has been buoyed by rising spending on in-home improvement projects. Renovations now contribute almost 75 percent as much to the economy as the purchase of new homes. What does this shift in residential sector spending tell us about the broader economy?

New housing slowdown

New housing construction has been dampened by the slow recovery in household formation rates. Demand for new housing stock is largely driven by household formation—when children grow up and move out of their parents' homes, they need houses to move into. So long as the overall population continues to grow, the creation of new households will spur demand for new residential construction.

During the recession, the rate of household formation fell sharply. Graduates struggled to find work in a weak labor market, and many delayed moving out on their own. Instead, they often chose to live with family or roommates while pursuing further education and waiting for the job market to improve. During the worst of the downturn, the household formation rate dropped to about 600,000 annually, down from a pre-recession level of 1.25 million.

As the labor market recovered, the household formation rate began to climb, returning to about 1 million annually today—still below the pre-recession pace. This may be a reflection of persistent pockets of weakness in the labor market; the nearly 2 million prime-age workers who remain detached from the workforce are likely also absent from the market for new housing.

Renovations pick up

Construction activity may be sluggish, but home improvement outlays are climbing rapidly. Spending on home improvement has reached almost $240 billion annually, up almost $50 billion from its pre-recession peak. Repairs and renovations now comprise about one-third of residential sector spending, accounting for approximately 1.25 percent of the nation's GDP.

Booming investment in home improvement is likely the result of improving household balance sheets and stabilizing real estate values. The market has almost entirely absorbed the imbalances created during the housing bubble. With few neighborhoods still underwater, real estate has largely recovered its recessionary losses. Homeowners are increasingly confident that money put into home improvement projects won't soon be erased by a volatile housing market.

Unlike the speculative bubble that drove housing prices to unsustainable levels before the recession, today's home values appear to be more in alignment with broader trends in growing income and wealth. As a ratio of rent, real estate prices are at historically normal levels—a sign that underlying values are being driven by demand for living space, not speculation.

Rising real estate prices have contributed to widespread gains in household wealth, which is at an all-time high. The ratio of net worth to income is also nearing a record, and unlike the speculative pre-recession run-up in household wealth, today's stronger balance sheets are based on a solid foundation.

The residential sector is stronger than new housing construction numbers suggest. As Americans see their financial footing improve, they're increasingly willing to spend on home improvement projects. Demand for new living spaces might be depressed, but homeowners are putting money into improving existing houses, and the economic impact of home improvement now rivals the construction industry as a driver of growth.

Infographic: The Home Renovation Revolution

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