Ken Harney — Home Equity Gains Boost Renovations

America’s homeowners have grown their equities by a mind-numbing $5 trillion since 1995, thanks to a 70 percent average jump in the values of their houses.

Guess what they’ve been doing with that wealth? Right: Buying cars, buying vacation property, paying kids’ tuitions, taking overseas vacations.

But some of the smartest of them, according to new research, have been liquefying part of their equities and plowing it back into their homes at a dizzying pace nearly one-quarter of a trillion dollars of home improvements a year. Those home improvement investments, in turn, usually help pump up the values of the homes even further.

Rather than the modest fix-up and do-it-yourself remodeling typical of decades past, owners today are focusing on high-end kitchen transformations, multiroom home additions, lavish bathroom and spa installations, entertainment rooms and other upscale renovations. Think big ticket.

Baby boomer homeowners those born between 1946 and 1964 are especially prone to think and spend big: Six in 10 of them completed a home renovation project in 2003, and they spent a prodigious $72 billion feathering their nests. That accounted for over half of all remodeling expenditures made on homes in the United States that year, according to a new report by Harvard’s Joint Center for Housing Studies.

Generation Xers those homeowners born between 1965 and 1974 are rapidly catching up to the boomers. From 1995 to 2003, the number of Gen Xers who own homes tripled, and their remodeling project expenditures soared more than fivefold. Already, they are beginning to rival baby boomers in average per-household expenditures on home renovations.

But there’s a key difference in the way boomers spend on their home improvements compared with the Gen Xers: Boomers not only spend more, they delegate more, rely on professional contractors more. Whereas 41 percent of Gen Xers’ home-improvement spending goes toward do-it-yourself projects, barely 26 percent of boomers’ outlays involve any form of do-it-yourself elbow grease.

And who said Gen Xers are slackers?

The new Harvard study, which primarily focuses on the country’s recent home-improvement boom, also sheds light on major demographic and social stratification patterns under way. Renovating your home, it turns out, says a lot about who you are and what you’ve already got:

The gap in incomes between households at the high end of the wealth spectrum and those at the low end is widening steadily. The average income of the top 20 percent of households is now 15 times those in the bottom 20 percent. In 1975, by contrast, the gap was less than nine to one.

Ninety percent of American households with incomes in the highest quarter own their own homes versus just 49 percent among those in the lowest quarter. Even among homeowners, the disparity between high income and low income households is vast. While only one of four homeowners is in the top 20 percent of all income earners, upper-bracket owners spent $69 billion on remodeling in 2003, nearly half of all home-improvement spending in the country that year.

Minority and immigrant families are relative latecomers to the American home equity party, and account for barely 15 percent of all home-improvement spending. But they represent the cutting edge of new homeownership growth they were 35 percent of all first-time buyers in 2003 and they’re likely to play steadily larger roles in housing renovation investments in the years ahead.

Home equity growth among all categories of homeowners has powered consumer spending in recent years, and greatly softened the impact of the recession of 2001-2002. Not only does home equity produce a psychological “wealth effect” on owners giving them confidence to buy goods and services but it also produces ready cash.

Homeowners pulled out $333 billion in home equity via cash-out refinancings between 2001 and 2003 nearly triple the level of the preceding three years. One-third of all cash-out proceeds went toward home improvement and remodeling.

Homes in the highest-cost bracket those valued at $400,000 and up represent just 11 percent of the total owner-occupied housing inventory. But the owners of those homes completed more than 800,000 room additions in 2002-2003, roughly 43 percent of all expenditures in that category for the year. The same 11 percent of high-cost homes accounted for disproportionately large shares of all kitchen remodelings (33 percent) and bathroom makeovers (32 percent).

But don’t ask the owners of those high-priced houses to do much in the way of fixups on their own. Of the $40 billion they spent on improvements in 2003, 85 percent went to professional contractors. Owners of homes worth $100,000 or less, by contrast, were far more active do-it-yourselfers, spending over one-third of their remodeling dollars that way.