The BuildZoom and Urban Economics Lab Index: First Quarter 2015

August 17th, 2015
in home sales and home prices

Special Report from BuildZoom

by Issi Romen, BuildZoom

  • Remodeling of existing homes is an indicator of economic health whose importance is on par with new home construction, and which better captures consumer confidence.
  • Remodeling of existing homes has fully recovered from the housing bust, and is 3.4% above its 2005 level. In contrast, new home construction is recovering only gradually and remains 60.7% below its 2005 level.
  • Locally, remodeling has surpassed 2005 levels in some metro areas, but not in others.

Follow up:

The remodeling of existing homes is an indicator of economic health whose importance is on par with new home construction. The size of the remodeling market is about $300 billion a year, not far from the $340 billion value of residential construction put in place last year.1 Unlike new construction, which captures the outlook of homebuilders, remodeling more directly captures consumer confidence. Moreover, new construction paints a picture of the economy that is skewed towards conditions in high-growth metropolitan areas – and on their outermost fringe at that – whereas remodeling reflects the state of the economy across a more evenly distributed geography, which better represents the nation as a whole.

The BuildZoom & Urban Economics Lab index is a joint endeavor of BuildZoom and the Urban Economics Laboratory of the Center for Real Estate at MIT. The set of indices leverages BuildZoom’s growing repository of building permit data to track residential permitting activity, including the construction of new homes and the remodeling of existing homes, and was developed jointly with Professor Albert Saiz of the Center for Real Estate at MIT. The current report introduces the indices at the national level, and supplements them with indices from a small, initial selection of metropolitan areas that will gradually be expanded.

National Indices for New Home Construction and Existing Home Remodeling
(Seasonally adjusted)
NatlTable

Index_National

The table and graph above present the BuildZoom & Urban Economics Lab indices for construction of new homes and for remodeling of existing ones, and sets them against the Case-Shiller national housing price index.

Both new home construction and remodeling have increased since 2009, but remodeling has recovered far more substantially. New home construction is currently still 60.7% below its 2005 level, implying that it has only recovered 11.6% of its 2005 to 2009 loss. In contrast, remodeling is 3.4% above its 2005 level, meaning that it has fully recovered and recently even surpassed its pre-crisis level.

Remodeling follows a similar pattern to new construction, but is far less volatile

The three indices share a common pattern, whereby they fell during the housing bust and have risen since, but they also differ in important ways. The most striking difference is that new home construction fell far more dramatically than the others. While home remodeling fell by an estimated 16.8% from 2005 to 2009, new home construction fell by a staggering 68.6%.

The dramatic drop in new home construction demonstrates the highly volatile nature of construction, which follows from the extremely durable nature of real estate. For non-durable goods, a decrease in demand tends to suppress production proportionally, but for an extremely durable good such as housing, decreased demand can be met entirely by existing homes, causing new construction to virtually grind to a halt. This is essentially what the index for new home construction shows.

The remodeling of existing homes, on the other hand, is not as volatile. This is consistent with the fact that it involves the replacement or repair of items far less durable than the home as a whole. Moreover, remodeling includes home improvement, but it also includes maintenance and repair, which are difficult to defer when the need arises and therefore contribute to lower volatility as well.

Nevertheless, remodeling still follows the same pattern as home prices and new home construction – just more moderately – and this owes to home improvement. Existing home sales often generate home improvement projects, either in preparation for a sale or following one. Also, home equity fluctuates in tandem with home prices, and because equity is often tapped to finance home improvement it causes remodeling to fluctuate in tandem with home prices, and therefore with new construction as well.

Metropolitan Area Indices

The following tables and graphs present seasonally-adjusted indices of an initial selection of metropolitan areas.

Metropolitan Area Indices of Permitting for New Home Construction

MetroResNewTable

Metropolitan Area Indices of Permitting for Existing Home Remodeling

MetroResRemTable
Chicago-Naperville-Elgin, IL-IN-WI Metro Area

Index_Chicago-Naperville-Elgin, IL-IN-WI Metro Area
Dallas-Fort Worth-Arlington, TX Metro Area

Index_Dallas-Fort Worth-Arlington, TX Metro Area
Phoenix-Mesa-Scottsdale, AZ Metro Area

Index_Phoenix-Mesa-Scottsdale, AZ Metro Area
San Francisco-Oakland-Hayward, CA Metro Area

Index_San Francisco-Oakland-Hayward, CA Metro Area
San Jose-Sunnyvale-Santa Clara, CA Metro Area

Index_San Jose-Sunnyvale-Santa Clara, CA Metro Area

The single most pervasive feature of the metro area graphs is that new home construction consistently fell more than remodeling in all of the reported metros, however the metro areas differ in the extent to which permitting activity has recovered.

The San Jose metro area – Silicon Valley – stands out. The growth in remodeling in the area since 2009 is double the 2005-2009 loss, so that remodeling activity is now higher than in 2005. New home construction in the San Jose metro area has also rebounded, regaining an exceptionally high 61.9% of the loss.

At the other extreme, remodeling in the Phoenix metro area is essentially the same as it was in 2009, and in the Dallas metro area it has actually been rising throughout the entire period since 2005. How is this possible? Both of these metro areas are relatively free of geographic and regulatory constraints on growth, which keeps their home values relatively low compared to other parts of the country. In such areas, gains in home equity are less important as a source of funding for remodeling. Further, because home values in these metros hover near or below the replacement cost, it is likelier there than elsewhere for it to be more cost-effective to move into a home with wanted features than to create them in-place by remodeling. In other words, homeowners in Dallas and Phoenix often face a better bargain listing their homes than loving them, and as a result fluctuations in remodeling activity are relatively independent of home values.

Additional indices show that remodeling has recovered 32.1% of its 2005-2009 loss in the San Francisco area, while new construction has recovered only 17.0% of the 2005-2011 loss (new construction in the San Francisco metro bottomed out only in 2011). Indices for the Chicago metro area are only available starting from January 2007, and one must caution that the 2005-2009 losses are probably greater than those from 2007 to 2009. Nevertheless, the indices for the Chicago metro area show that remodeling has recovered 58.8% of its 2007-2009 loss, while new construction has recovered only 25.0% of the 2007-2009 loss.

Methodology

The BuildZoom & Urban Economics Lab index leverages BuildZoom’s repository of building permit data using a simple additive chaining method, developed and assessed in collaboration with Professor Albert Saiz (MIT). The performance of the method was assessed using a Monte Carlo simulation study, and a comprehensive account of the method and its assessment is available in a supporting technical document.

The national BuildZoom & Urban Economics Lab index of permitting for new homes is highly consistent with the corresponding numbers of permitted new homes published by the Census Bureau.2 The following graph compares the two (before adjusting for seasonality).

ResNew_BZ_vs_Census

The BuildZoom & Urban Economics Lab index complements residential building permit statistics published by the Census Bureau. The Census’ Building Permits Survey considers only new homes, not existing homes. In addition, whereas the Census figures are obtained from a regular questionnaire asking local governments how many building permits were issued (Form C-404), the BuildZoom & Urban Economics Lab index is compiled from the ground up, based on individual building permit records.

Transparency

BuildZoom and its partners at MIT are firmly committed to transparency of data and methods. The building permit data repository can be browsed online for free, the indices and their components are available for download, and the method used to generate the index is explained in detail in a supporting technical document. Neither the data nor the methods are perfect, and we openly invite users to inspect the resources provided and alert us to what they find.

Download this report in pdf.


Notes:

  1. The remodeling figure is drawn from Figure 1 of the report entitled “Emerging Trends in the Remodeling Market,” published by the Joint Center for Housing Studies at Harvard University in January 2015. The figure for residential construction put in place is the average annualized monthly value drawn from the Census Bureau’s C-30 series.
  2. A small but systematic discrepancy between the index and the Census figures emerges because the former corresponds to building permit counts whereas the latter corresponds to numbers of housing units permitted. This is particularly noticeable in the context of the recent rise in the share of new construction that is multi-family. For additional details, see technical document.









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