The housing market has been one of the best-performing sectors in recent years. Both new and existing home sales have been booming, home prices have been surging, and there has been plenty of talk about a bubble in the housing market. Regardless, it's commonly believed that buying a home was one of the best investments one could make during the tough economic times of the past few years.
As a result, it's not surprising that according to the most recent UBS/Gallup Index of Investor Optimism survey*, many more investors say they plan to increase their spending on home improvements during the first half of 2004 (38%) than say they plan to decrease spending (16%). More investors also plan to increase (24%) rather than decrease (17%) their spending on consumer electronics. However, fewer investors plan to increase their spending on major appliances (16%) than plan to decrease spending on these items (22%).
More Investors Plan to Increase Their Home Improvement Spending
The gap between those who plan to increase their spending on home improvements and those who plan to decrease it is just about the same for substantial investors (those with more than $100,000 in investable assets) and average investors. On the other hand, it appears that male investors are planning more home improvements than female investors are, and younger investors are planning more than older investors are. The gap is smaller among women and among those older than 40 than it is among men and younger investors.
Good Longer-Term Prospects
In the past, it was often said that homeowners were better off purchasing a higher-priced home, rather than spending a great deal of money on home improvements; conventional wisdom in the home market has been that sellers rarely get back the money they spend on home improvements.
More recently, a number of important factors have offset this idea. First, existing homes have been increasing in value at a healthy pace, so the investor's home is a rapidly appreciating asset. Even more importantly, low interest rates and equity financing have allowed homeowners to tap their housing appreciation for home improvements. Thus, the home improvement business has been good recently.
Odds are that home improvement will continue to be a good business for years to come. Increasing home prices and low interest rates have also changed the longer-term outlook for the home improvement business. Assuming inflation and interest rates increase as the economy expands during the next couple of years, many of today's homeowners could experience a "lock-in" effect. That is, if inflation keeps housing prices escalating even as long-term interest rates move significantly higher, the combined impact will be a much higher monthly payment for any family wanting to move up to a larger, higher-priced house. As a result, many homeowners could end up locked into their current homes.
Of course, such a scenario would probably spell bad news for the overall housing market, as sales decline from today's record levels. On the other hand, it would free up capital for increased business investment and economic growth. It would also be good news for the home improvement business, as today's strong demand could be extended for years to come.
*Results are based on telephone interviews with 803 investors, aged 18 and older, conducted Dec. 1-14, 2003. For results based on these total samples, one can say with 95% confidence that the margin of sampling error is ±4 percentage points.
