As an economist who follows a lot of the media narrative around housing, I’ve seen firsthand how the discussion around housing and home improvement markets can be confusing, even for experienced industry executives. It’s easy to hear a lot of news about the housing market and take it at face value, but now more than ever, it is important to have context for everything.
First, most economic trends have multiple effects, sometimes in competing directions. For example, interest rates are rising, which makes debt, spending, and business expansion more expensive. We should also expect less consumer spending and fewer home sales. However, there’s an alternative impact: Higher interest rates anchor people to their existing homes and disincentivize moving. If you’re in the remodelling business, millions of prospective customers who want a new kitchen or bath and might have moved to get it are likely not going to do so. Why give up a relatively cheap mortgage to move to a new house when remodelling their existing home becomes a better deal?
Similarly, home prices have increased considerably over the last two and a half years. This has unfortunately pushed homeownership out of reach for many people. But, it has also created over $7 trillion in new homeowner equity to fuel remodelling and improvement spending.
Or take inflation, which is at the highest level in decades. It erodes buying power and hurts consumer sentiment, which reduces spending. But on the flip side, it’s also eroding the effective spending burden of millions of mortgages for homeowners, making them proportionally wealthier in the long run.
Each of these occurrences is competing to shape how the market is evolving, and you want to be sure you understand each aspect of these tradeoffs as you plan your business decisions.
The second reason context is so important is that sometimes things are true but do not give the complete picture of what’s happening. It’s the age-old forest for the trees problem.
For example, there is the discussion of a housing slowdown based on month-over-month declines in some market prices, offers, and foot traffic. But this should not be mistaken for an actual shrinking of the market.
Take our latest research in The Market for Everything Home, for example, which estimates 10% growth in home improvement and the home service market this year. This may feel slow relative to the roughly 20% increase last year, but it’s still a healthy level of growth. And more sustainable too.
As we enter the second half of 2022, remember that this is a transitional year for the home service market. The explosive growth rate we saw last year as massive portions of consumer spending shifted to the home during the global pandemic has begun to taper off. But don’t forget other factors also shaping the market in the long term: family formation for younger generations, aging in place for older generations, growing consumer demand for high-style living and state-of-the-art home amenities, geographic moving patterns, and shortages of skilled labour forcing more product innovation. So, to keep your craft and your business up to date, you must understand all these market fundamentals.
For the 90% of homeowners locked into mortgages with rates lower than 5%, their mortgage payment is no longer as large relative to all their other expenses, which have grown due to inflation.