Americans are stepping up spending on home improvements for the first time in years, giving a small lift to the beleaguered construction sector.
Economists forecast that spending by homeowners and landlords on everything from minor sprucing up to full-scale remodeling rose modestly in 2011. That would mark the first year since 2006 that such spending increased.
Forecasting firm IHS Global Insight is predicting a 3.3% increase to $152.4 billion in 2011, not adjusted for inflation, and an additional 5.7% in 2012. That comes amid other signs of momentum in residential renovation, such as a report this week showing confidence among builders of single-family homes is at its highest level since mid-2007.
An index of remodeling activity compiled by BuildFax has climbed steadily from 103.3 a year ago to 137.9 in November, the latest available data. The index fell between October and November, likely due to seasonal factors, BuildFax said.
"People are remodeling instead of moving," said David Crowe, chief economist at the National Association of Home Builders.
Most of today's renovations aren't sweeping: They are more likely to feature new lighting or updated kitchen cupboards, rather than an extra bathroom. With home prices still battered, and with many owners unable to get bank loans because they owe more on their residences than they are worth, few are undertaking major projects.
The rise in home-improvement spending comes as the economy and consumer confidence are picking up. It is giving the construction industry an outsize boost because new home building—which normally accounts for more than half the market by dollar value—remains severely depressed by historical standards. The benefits also have extended to retailers of home-improvement materials, some of whom have seen their stocks rise in 2011, along with the uptick in projects.
Home improvements have gotten a lift from several fronts, starting with the fact that spending has been depressed for so long. Energy tax credits that were part of the government's 2009 stimulus act prompted some owners to upgrade to energy-saving roofs or heating systems, though that has expired. And while real-estate prices are still falling, they aren't seeing the precipitous declines that prevailed during the recession.
"There was a time when people were waiting for the other shoe to drop, now they realize it's just going to be a long slog so they might as well enjoy it," said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage based in Seattle.
Rich Fitterer likes his home and wants to stay, even if he owes more to the bank than the property is currently worth. Next week Mr. Fitterer, an engineer in San Marcos, Calif., just north of San Diego, will begin construction on a $40,000 garden with native plants and a patio to replace his disheveled yard. It will have three-foot boulders, a sitting wall and a rock creek that will spring to life on the rare rainy day.
Mr. Fitterer and his wife bought their house in 2004, for $565,000, and he estimates it would fetch $400,000 today. Much as that hurts, he's doing the garden, after years of neglect, for reasons that are mostly emotional. He's secure in his employment and likes being in a neighborhood that is 10 miles from the beach and Pacific Ocean. His two children, 5 and 2, are similarly happy with their surroundings. "We've made the decision we'd like to stay here so we'd like it to be a place we can enjoy," he says.
While some homeowners have resumed repairs and renovations, others remain skittish about putting money into properties that have fallen sharply in value. Those price declines also have removed a traditional means of financing housing renovations: cash-out refinancing, where homeowners replace their mortgage with a larger loan and pocket extra cash for spending.
During the third quarter of 2011, homeowners took out around $5.3 billion in home equity from their homes by refinancing prime mortgages, according to Freddie Mac, down from $6.3 billion in the second quarter and far below the peak of $83.7 billion in the second quarter of 2006.
That's why smaller projects are powering most of the recent increase, said John Burns, a consultant for building-supply companies. Residents are "not doing big additions like adding on a room," said Mr. Burns, who expects home-improvement spending to increase through 2012.
The carnage in the housing market has made home improvements critical to both builders and the economy. Spending on single-family home construction has fallen so far that individuals now spend more on home improvements than builders do on new-home construction. At the peak in 2005, $434 billion was spent on single-family homes, more than two-and-a-half times the $164 billion spent on home improvements. That reversed in 2009. In the third quarter of 2011, improvement spending was 42% higher than single-family home construction.
Greg Rubin, owner of California's Own Native Landscape Design and Mr. Fitterer's landscaper, says remodeling jobs are keeping him afloat during the lackluster housing market. Today, he gets about five remodeling jobs from existing homeowners for every one job on a new home—a reverse, he says, of the proportions he saw during the boom.
Homes have "gone back to being a house again instead of an ATM," he said. "I do think, long term, people think they'll get a return on their investment. But they're being realistic and realizing that's a number of years off."