December 9, 2022

Home renovation lending demand may get temporary boost from inflation

Even new buyers may be spending large amounts for alterations and repairs a year after…

Even new buyers may be spending large amounts for alterations and repairs a year after their home purchase, according to a new National Association of Home Builders report.

The average spend for a new-home owner has been $11,900, according to the NAHB’s analysis of three-year data through early 2020 from the Bureau of Labor Statistics’ consumer expenditure survey.

That spend, which on average was roughly twice as high for resale buyers, suggests builder-home purchases can also play a role in demand for renovation financing.

While home alterations were attractive earlier in the pandemic due to growth in remote work, buyers are now interested in making tweaks due to a new driver: inflation that makes commuting for work or play less attractive.

“If you asked me today, I’d say if that trend is going to continue, and I would pin it on gas prices,” said Jim Bopp, a vice president at Planet Home Lending, in an interview. “People in say, New York, are thinking, do I want to spend $300 on gas and drive to the Adirondacks for the weekend, or put in a pool?’”

Homebuyers likely will need financing for such projects because their budgets have been stretched about as far as they can go. Growth in the three months ending April 30 was a mere  0.3%, according to Redfin. That’s the smallest increase since June 2020. 

Also attesting to the strain on buyers from inflation, stock market volatility and higher rates; luxury home sales saw the largest drop since the pandemic in the three months ended April 30, Redfin found. Sales fell nearly 18%, compared to almost 5.5% for non-luxury homes. (Redfin defines luxury homes as those in the top-five price tier for the local market.)

“People are increasingly on the lookout for houses a little bit under market,” said Bopp, who is a VP of national renovation lending in Planet’s correspondent division. “They’re going to try not to overspend.”

While new-home alterations such as a pool installation account for some of the demand in his business and can have high price points, Bopp said it’s more repairs on older homes that are more outdated than distressed that are fueling the bulk of renovation lending activity.

“They’re houses that could be well maintained and taken care of, but where somebody is going to walk in and say, ‘I don’t want the green cabinets and the orange countertop,’” he said.

Although budgets for work like that are increasingly under strain, the persistence of high home-equity levels gives a lot of buyers the means to finance, said Doug Perry, a strategic financing advisor at online platform Real Estate Bees.

“Many existing homeowners have lendable equity they are sitting on that can be tapped to do home improvements, which is often more affordable than selling and buying a similarly upgraded home,” Perry said in an email.

Home equity lines of credit and other renovation loans have been on the rise as a result, but some studies suggest that if consumer expenses keep rising, those gains could slow.

“The level of annual expenditures for home improvements and repairs is set to expand to nearly $450 billion by the first quarter of 2023,” said Abbe Will, associate project director of the remodeling futures program at the Harvard Joint Center for Housing Studies, in a press release earlier this year. “Yet, the rising costs of project financing, construction materials, and labor, as well as growing concerns about a broader economic slowdown or recession may further slow remodeling growth.”

To date, however, renovation lending anecdotally seems to be going strong and making up for some slowing in first-lien lending, Bopp said.

“I’ve been talking to some credit unions. Their first mortgage volumes have been off maybe 57%, but their equity lending is up 70%,” said Bopp. “So people are going to tap into that newfound equity and not touch that 30 year, 3% fixed rate mortgage they may have, unless they really need to because they have to move to another state or something.”