August 5th, 2016 | Renovation Fun!
Thin housing inventory has contributed to a spike in remodeling as buyers pour money into their current homes instead of moving — often using home equity to do it.
When people stay put, it can reverberate through the housing market, making it harder for first-time buyers to get started — and, some say, highlighting a need for more construction. Without enough new homes, said Seattle real-estate agent Sam DeBord, the market could be stuck in “a self-reinforcing cycle.”
‘There’s not a lot of quality inventory out there’
There was 4.5 months of housing inventory for sale in the U.S. in March, according to the National Association of Realtors, meaning it would take that long for every house on the market to sell at the current pace of sales. Higher inventories benefit buyers, while lower ones benefit sellers; a market is generally considered balanced when there’s five or six months of inventory.
The main reason for the shortage, according to National Association of Realtors chief economist Lawrence Yun, is that there hasn’t been enough new-home inventory added over the past decade: Homebuilding contracted after the last housing crash, and is still catching up to current demand.
Yun believes the shortage won’t improve soon; if so, experts say, even more potential buyers could be driven out of the market.
With mortgage rates expected to rise in the coming years, some may not move for another reason: They’ll want to keep their 30-year fixed-rate mortgages in the 3.5% range, said Svenja Gudell, chief economist for Zillow. The Mortgage Bankers Association predicts rates on 30-year fixed-rate mortgages will rise to an average of 4.7% in 2017 and 5.2% in 2018.
Meanwhile, experts say the homes currently on the market often aren’t what people are looking for: move-in ready homes that don’t need much work.
“There’s not a lot of quality inventory out there, and when it comes on the market, it goes very quickly,” said Geoff Horen, chief executive of The Lifestyle Group, an Indianapolis residential remodeling company. So homeowners face a choice: Buy a property that needs work, build, or put money into their current home.
“People get discouraged,” said Matt Silver, president-elect of the Chicago Association of Realtors. “Because there is such low inventory, people are like, ‘OK, that’s what we’re going to do, rehab and update, and when the market is more free-flowing, then we will go and try to find something,’” he said.
Meanwhile, home-improvement spending is expected to reach its highest level in a decade by early next year, according to Harvard University’s Joint Center for Housing Studies. Remodeling spending is expected to reach $325 billion by early 2017, according to the university’s Leading Indicator of Remodeling Activity.
Remodelers say homeowners are doing more discretionary projects — upgraded kitchens and baths, for example, with higher-end finishes — many which were put off after the housing bust.
“They’re not afraid to pick the nicer tile,” Horen said. “Once someone looks around and can’t find what they want…and decide to stay and invest the money, they are probably doing it with a different mind-set. They might be inclined to spend more.”
Cash-out refinancing activity is at precrash levels
A fundamental reason homeowners see remodeling as an attractive alternative to moving: More are now eligible to tap their home’s equity to pay for improvements.
When home prices plummeted in the last housing crash, homeowners lost trillions of dollars in home equity. Some owed more than their homes were worth. Home-equity lending naturally waned.
Years later, it’s a different story. By the end of last year, 91.5% of residential properties with mortgages had equity, according to property information company CoreLogic. Home equity has increased by $6 trillion since mid-2011, and more than 60 million homes have at least 25% equity.
The share of cash-out refinancing activity — in a cash-out refinance, the new mortgage amount is higher than the unpaid principal balance of the old one, putting cash in the borrower’s pocket at closing — has reached levels not seen since before the housing crash.
In the fourth quarter of 2015, 41% of first-lien refinances were cash-out transactions. according to Black Knight Financial Services, up from 34%, 29% and 18% in the fourth quarters of 2014, 2013 and 2012, respectively. In the third quarter, 42% were cash-out transactions, the highest on record since 2008. (Black Knight defines a cash-out refinance as one in which the amount is at least 5% greater than the balance of the original mortgage.)
Synopsis of an article by Amy Hoak, Personal Finance Editor at Market Watch