Rising mortgage rates and record house prices have dramatically slowed the housing market. Sales of existing homes are averaging under four million per year at an annual rate so far this year. As recently as early 2022, homes sales were running at a pace in excess of six million per year. A major factor in this slowdown is that given high mortgage rates, many owners are reluctant to move. Mortgage rates are running around 7 percent, and residential real estate company Redfin reported earlier this year that almost 60 percent of current owners have mortgages below 4 percent, encouraging them to stay put in their current home with their current mortgage.

What does this lack of mobility in housing mean for the remodeling market? These homeowners who are hesitant to move may instead improve or add onto their current home, therefore generating more remodeling activity. However, owners who want to move but are waiting for mortgage rates to ease are not likely to undertake major improvement projects.

Analysis of homeowner spending patterns on home improvements shows that the biggest spenders are households who have recently purchased a home. Owners who have purchased within the past two years on average spend 30 percent more on home improvements per year than households who have not moved over this period according to the Joint Center’s most recent Improving America’s Housing report. If that recent mover is a previous owner, spending is 64 percent higher.

So, the stuck housing market is expected to depress home improvement spending. The Leading Indicator of Remodeling Activity (LIRA) is projecting that spending nationally will decline about 6.5 percent this year. However, given that the market composition is more heavily weighted to longer-term owners than recent buyers also suggests that the composition of home improvement spending will be different this year. In previous years when recent buyers comprised a larger share of home improvement spending, a higher portion of that spending was for bigger ticket discretionary projects as compared to traditional replacement projects.

Take for example home improvement spending over the 2006 to 2007 period near the peak of the housing boom. The remodeling market was strong then. Existing home sales averaged 5.8 million a year, and recent buyers accounted for almost a quarter of total market spending. Compare that to the 2012 to 2013 period which was near the bottom of the housing downturn. Existing home sales averaged under 4.9 million a year over this period as lending was much more restrictive since lenders were compensating for the generally easy underwriting excesses leading up to the Great Recession. As a result, recent buyers accounted for less than 15 percent of market spending.

How did these housing market conditions affect the home improvement market? Over the 2006 to 2007 period, the largest home improvement categories were kitchen and bath remodels and room additions, which combined for 37 percent of total market spending. Exterior replacements (roofing, siding, windows and related projects) and systems replacements and upgrades (plumbing, electrical, HVAC and other major systems) combined accounted for just over 29 percent of total home improvement spending, the rest being for interior work, other projects on the property, and disaster repairs. Over the 2012 to 2013 period, a mere 27 percent of home improvement spending was for K&B projects and room additions, while the exterior replacements and systems share jumped to 37 percent.

What about flooring you might ask? Flooring is one of the few home improvement categories where the wallet share stays relatively stable throughout the remodeling cycle. Spending on the flooring, carpeting, paneling and ceiling tiles in the home improvement category did fall with the decline in home sales post-Great Recession, but the share of total spending stayed remarkably stable at 9 percent. So, while spending on flooring products is expected to see a minor decline this year, its market share should stay reasonably constant.