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Headline news in this pandemic-induced recession has been the
performance of recreational vehicles (shipments up 31% through
September), and boats (powerboat sales up 21%). What is lost in the
hype is the relative size of these markets. Shipments of motor
vehicles are roughly US$30 billion. The value of shipments of ships
and boats combined was US$24 billion.
The US home improvement market represents a $440 billion
opportunity for products alone, according to research conducted for
the Home Improvement Research Institute by IHS Markit. To put this
in perspective, shipments of food products were US$529 billion in
2019.
Recessions are not kind to home improvement spending, as the
chart below indicates. The Great Financial Recession of 2008-09
resulted in three years of home improvement spending declines,
compounding into double digit losses. Yet home improvement and its
supply chain are one of the few bright spots in the US economy,
with home improvement product sales expected to rise 8.7%. It is
fair to ask why, and more importantly, can it continue?
The irony is that in the steepest and deepest recession in US
history, the conditions are actually positive for investing in
one's home. In a typical recession, incomes collapse, home values
stagnate or fall, household wealth withers and consumer confidence
collapses. Home improvement, and even some home maintenance is
deferred.
The first notable feature of this recession is the occupational
impact; it fell squarely on the retail, hospitality, and personal
service sectors. Workers in these industries typically have lower
incomes, are often entry level and are renters, not homeowners.
Meanwhile, professional and business services employees were likely
to be able to switch to remote work and maintain their incomes.
Moreover, the policy response to the recession was quick and
large. Interest rates were cut to essentially zero, the Fed
unleashed massive liquidity and the federal government sent
incentive checks to many households in addition to increasing
unemployment insurance. The net result of relative job security
among homeowners, combined with low financing costs and even a cash
infusion was to alleviate the negative household income effect seen
in virtually all recessions.
Importantly, the housing market was in balance prior to the
recession. Indeed, one could argue that it was in shortage.
Mortgage forgiveness practices prevented those who did lose jobs
from dumping homes onto the market, at least for 2020. The desire
to leave cities for suburbs and rural areas actually increased the
demand for housing in some markets. Accordingly, home prices have
continued to rise, and homes are typically a family's most
important financial asset. As such, the incentive to invest in that
asset is clear. Additionally, while financial markets have seen
considerable volatility, there has not been a market collapse, so
overall household balance sheets remained relatively strong.
The income and wealth effects only explain why the home
improvement market might remain stable. The boom comes from
additional factors. The most obvious is that families were confined
to their homes for months and continue to have limited options
outside the home. The first instinct was to catch up on tasks that
had been planned or desired anyway - painting a room or upgrading
fixtures. However, as it became clear that this was a event of some
duration, larger needs (or wants) took over. Home offices became
necessary, especially for families with two working spouses and
children engaged in remote learning. The paucity of chances to dine
out created the necessity (or opportunity) to cook more at home,
and kitchen renovations have become popular. Gym closures prompted
some homeowners to create home gyms, or at least work out areas.
The inability to travel turned the backyard into weekend and
vacation space leading to investments in decks, landscaping,
gardens and even pools.
The lack of meals away from home and vacation travel also
created space in family budgets for home improvement spending. In
an economic sense, we have seen a massive transfer of spending from
leisure activities to home improvement.
Finally, the surge in home improvement spending was augmented by
demographics. At one end of the age spectrum, the disproportionate
impact of the pandemic on elderly housing led many seniors to
reconsider the option of staying in their own home. To do so
required investments to accommodate their individual disabilities,
such as ramps and modifications to doors, hallways and fixtures to
deal with mobility issues. At the other end of the spectrum,
Millennials have become the largest home buying demographic. The
shortage of new housing, combined with rising home costs for those
just starting their careers, means that this new wave of homeowners
is buying existing homes. Indeed, existing home sales performed
well in 2019 and, while down in 2020, are holding up better than in
past recessions. Existing homes generally require some work, most
commonly painting, kitchens and baths. Millennials are also
addicted to technology, so home automation items have also proved
popular.
The net result has meant good fortunes for retailers engaged in
home improvement items. The nature of many home improvement
products is that they do not lend themselves well to e-commerce, so
this has been a rare source of growth for the retail sector. It has
also been good news for the manufacturers of these products and
their supply chains. This has been very apparent in lumber prices,
where strong demand combined with production shutdowns in the
spring, have sent pricing soaring.
The important question is whether, and how long, the home
improvement boom can last.
As one considers the factors that got us here, there is reason
for optimism. We will not see another spike in growth, but we can
expect the strong level of activity to continue into 2021.
The demographics are the most certain - the generational shift
of Millennials is a long-term event, and will transform the overall
economy, not just home improvement spending. Home automation
products are clear winners as they are adopted across the age and
income spectrum to improve security, energy efficiency and overall
quality of life.
The stimulus incentive is less certain. We do expect interest
rates to remain low for several years, however, additional federal
spending is widely regarded as necessary, but the size and timing
of any package remains unclear. The slowing of economic growth in
the third quarter and a final outcome of a protracted political
season may allow an agreement in the coming month. The increasing
unemployment rate amongst those not in the retail or personal
service sector is a concern that could impact homeowner confidence,
although one that we expect to fade as economic growth
continues.
It appears that the expected resurgence of the pandemic in the
fall and winter is upon us, with new high levels of infections and
increasing hospitalizations. Restrictions are once again being
imposed in some states on restaurants, gatherings and other
out-of-home activities. The belief of most medical experts is that
there are several months of pandemic-induced challenges in front of
us. Indeed, we are already seeing conferences scheduled for the
first half of 2021 being moved to the second half of the year. This
suggests that homeowner behavior is likely to continue well into
2021. Indeed, the move to working from home may be permanent for
many individuals. As such, not only will the desire (and necessity)
of doing more at home continue, the spending choices associated
with that change - more income assigned to the home rather than
leisure activities - is also likely to persist.
There is also reason to believe that pent-up demand will
increase the duration of the home improvement surge. The very same
shortage of contractors that led to the housing shortage is also
limiting their ability to undertake home renovations with many
contractors reporting being booked into 2021 already. While most
home improvement products are bought by do-it-yourself (DIY)
consumers, about a third of the product market is purchased by
professional contractors. This does suggest the potential for
differential outcomes by product in 2021 - products used mostly by
professionals, such as dimensional lumber and HVAC may outperform
more traditionally DIY products such as paint. Still, this will be
a matter of gradation, we do not expect any home improvement
product to experience a material retreat.
If medical advances progress as expected, the impact of the
pandemic will fade in 2022, and with it some of the stimulus and
household budget allocation decisions that favor home improvement.
However, if the pandemic impact becomes limited, that will also
allow stronger economic growth, which is historically correlated
with home improvement spending. We expect home improvement spending
to continue at a high level in the medium term (next five years)
with some moderation in growth.
Posted 10 November 2020 by Scott Hazelton, Director, Construction, IHS Markit