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WHEN IS A GOOD TIME TO REMODEL THAT KITCHEN?

As mortgage rates may increase over the next few years, home improvement activity is likely to increase.

Negative Effect

The negative effect will stem from an expected slowdown in the growth of home sales. When mortgage rates increase, we expect to see slower growth in the volume of homes being bought and sold. As an aside, in the immediate term, there can be an uptick in sales as people who were “on the fence” jump to buy before rates go significantly higher. But that effect does not persist for very long.

We would expect a negative effect on the rate of growth of home improvement spending to accompany a slowdown in sales volume growth. That said, 92 per cent of home improvement spending — spending on projects such as kitchen and bathroom remodels — comes from people who are not moving. Remember, any slow down in home sales is greatly outweighed by more powerful positive forces like home appreciation, consumer confidence and the sheer age of the housing inventory. When home owners cautiously refrain from maintenance spending, it is simply deferring more spending in the eventual future.

Positive Effect

Many people who managed to secure a mortgage with a fixed rate in the 3 to 4 percent range will be somewhat reticent to sell and buy after rates get up near 5 percent. Some of those people will decide it’s better to improve their existing homes than lose their low fixed rate. Think of it this way: Going from a 3.5 percent rate to a 5 percent rate means a 16 to 20 percent increase in the total monthly payment (depending upon assumptions regarding taxes and insurance). And that’s just making a lateral move from one $500,000house to another $500,000 house. The prospect of such a significant monthly payment change may be enough to encourage people who don’t have to move, to update, improve or even add on to their current homes instead of moving.

Looking Forward

The bigger question is this: Will home equity keep rising strongly, or will it slowdown? It will certainly slow, partly because higher interest rates translate into lower asset values (including home values), all other factors held constant. My expectation, though, is that home equity will remain a strong-though-slightly-diminished correction for home improvements in the next several years. There are a lot of complicating influences to consider, but the outlook for the home improvement industry growth is bright, even (or especially) with the prospect of higher mortgage rates around the corner. Since kitchens have long been recognized at the top of the list to invest and enjoy,.....Go For It!

- Ron Oakes, President