Construction Costs – State of the Remodeling Industry

From the point of view of construction and remodeling industry the biggest irony of the housing bubble collapse and economic downturn that followed it, is that both commercial construction and residential remodeling companies which used to rip great profits during the housing boom, suffered immensely once the housing market collapsed. “The recent remodeling downturn was the most severe in the last 25 years, with a 12.5% decline in remodeling spending from 2007 to 2009”. (Citation: http://www.remodeling.hw.net/economic-conditions/state-of-the-nations-housing-remodeling-industry-poised-for-growth.aspx)

While it is true that every segment of the industry has suffered the consequences of the economic recession, commercial construction companies and businesses that are dependent upon the overall health of the construction and remodeling industry (Building material suppliers, and manufacturers) were among the ones most affected by the turmoil of global recession and global economic downturn.


Cost-to-Value, Remodeling Costs Recouped as a percentage of resale value

In the United States, the demand for construction and remodeling services is closely tied to the overall stability of the real estate market and housing prices. During the recessionary economy when housing prices are falling, the demand for remodeling services is greatly reduced due to greatly reduced cost-to-value ratio which stands for the recouped value of a remodeling investment that the property owner would get if he or she decided to sell their property after it was remodeled.

Despite the economic slowdown that followed the housing bubble burst in 2006 and 2007, and the reduced demand for construction services, the construction costs continued to rise ever so slightly up until the year 2010. In the year 2010, the construction and remodeling industry has experienced the most drastic, 10.4% decline in overall average construction costs, which brought it down to a level unseen since the period in between the years of 2006 and 2007. But, despite the lowering of the overall average construction costs, the falling real estate values further reduced the average recouped resale value of a remodeling investment by 15.8% compared with the last year, which marks the biggest drop in the last 8 years.

As a result of falling resale values of the remodeling investments, many homeowners are cautious about spending money on remodeling and home improvement. When homeowners do decide to spend some money on remodeling of their home, they do so more willingly for the need based improvements such as exterior replacement projects. These types of projects help protect a homeowner’s investment and contribute to curb appeal of the home.

Granted, it is no longer 2007, when the remodeling spending peaked long after the collapse of housing market, but before the collapse of the U.S financial system. Nowadays, many homeowners are still cautious of home improvement spending just as the potential home buyers are still guarded and cautious, but there is new hope in the air; Joint Center for Housing Studies of Harvard university has released a 2011 remodeling report predicting a new decade of growth. JHS predicts a 3.5% growth in the remodeling spending adjusted for inflation.

The report provides a diagram, which forecasts five years into the future predicting that homeowners will start spending more freely on home maintenance and home improvements. It is also interesting to note, that the report’s prediction that many homeowners will likely focus on energy efficient upgrades, particularly retrofits such as metal roofing, metal wall panels, and Eco-friendly and energy efficient siding, energy efficient windows, and green insulation products.

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