Will Home Renovation Costs Go Down in 2024 as Demand Begins to Dip? w/WSJ’s Ryan Dezember

Dave:

Will home renovation costs ever become reasonably priced again? And will Americans continue to just dish out whatever they have to pay for home remodels and renovations because they’re preferring to stay in place rather than trying to move to new homes? Today we’re going to dig into the home repair market and what it looks like after the pandemic. Hey everyone, it’s Dave Meyer. Joining me today is the master of home renovations and construction at James Dainard himself. James, I know that costs in terms of renovation and supplies have really been impacting your business, so hopefully you’ll have a lot of good questions for our guests here. Today

James:

Is boring, is building cost material sounds. It’s one of the most exciting things I can talk about, has such impact on a daily basis, and I’m always addicted to the deal, find cheaper products. It’s a puzzle right now to get your cost down.

Dave:

Well, I’m glad we brought in you as the co-host today because you’re probably the only person on earth who thinks that this is super exciting. But I agree that it’s important, exciting or not, this stuff really matters because as an investor you want to understand how to be most cost effective, how to time, potential renovations, when and where you want to add value to your properties. And so to help you understand that all we’re bringing on Ryan Dezember. He’s a reporter at the Wall Street Journal and he covers all sorts of things like commodities, oil, natural gas, lumber, and rental houses. And today we’re going to talk to him about the stark rise in home remodeling costs from peak pandemic numbers until now and what the true drivers of those costs are. And then we’re going to discuss some indicators that predict what we may see in the future. We’re curious if we’re at the tail end of a home repair, boom, are we in the middle? Are we at the bottom? What is going on in this industry and the larger housing market so that we all can make informed investing decisions? So James, if you’re ready, let’s bring on Ryan.

Ryan, welcome to the show. Thanks for joining us today.

Ryan:

Thanks for having me.

Dave:

For our listeners who aren’t super closely following the home repair industry, I am one of those people. Can we just take a step back and have you walk us through what’s been going on with just home supplies and repair costs? Maybe let’s start with the beginning of the pandemic.

Ryan:

Yeah, so if you go back to lockdown, if you remember, we were all suddenly at home, markets were crashing stocks, commodities, pretty much any asset class was tumbling in the unknown. And that summer what started to happen, we noticed that lumber futures started ticking up really rising pretty sharply. And if you think back, everyone’s stuck at home, everyone’s bored, everyone’s not going out and spending money on going to baseball games or dinner or movies, vacations. They’re looking around their house and they’re like, how can we make this house better? We’re here. Let’s do that project. Let’s clear out the old bedroom and make a home office. Let’s build our dream deck. All these things are happening and everybody has the same idea at once. And you may remember lumber futures, they almost became like a meme or a joke they shot up. So take me somewhere someplace expensive and it shows a couple eating dinner in the lumber aisle at Home Depot and sort of remodeled and mass. And what happened is that accelerated a long trend in home improvement and repair spending that we’ve had in America over the past couple decades. And it really just juiced it and to the point where we had lumber futures go to nearly three times the pre pandemic record, just obscenely expensive two by fours, which are sort of the base commodity for building and repairs.

And that really didn’t slow down when the feds started raising rates to cool down inflation and just sort of douse all that spending that comes from rising property values and full savings accounts, lumber prices did react and they were the first thing to sort of fall one of the first asset classes, but it didn’t really change Americans mentality or desire to do to remodel their homes and repair their homes. And now we’re sort of two years in, we’re starting to see signs that that is slowing down. Lumber prices have fallen, we’re starting to see some other things happen that suggest maybe this long boom in home repair and improvement spending is starting to slow down. There’s a group at Harvard that studies this and they put out an index called the leading indicator of remodeling activity that has started showing the first downturn in annual spending of this sort since the housing crash of the two thousands to 2008, 2009 housing crash. So these businesses that supply building materials are really on high alert for that to happen. We don’t know if it’ll come true. Every time it predicts a downturn, something happens. It predicted the last time it predicted a downturn was heading into 2020. It didn’t predict the pandemic and what would happen there. So we’ve had this tremendous acceleration and now we’re sort of seeing the brakes being put on.

Dave:

And when you say that it’s coming down, is it total remodel costs like individuals are spending less money? Is it that less individuals are doing projects or that material costs are actually coming down?

Ryan:

Yeah, that’s a good question. Really. You kind of have to look at it in a couple different segments. You want to paint a room, you want to replace the faucet in your bathroom. Those are small jobs. You go to the hardware store, you get it done, it’s under a few hundred dollars, you do it yourself. Probably those things are going to still continue a pace. And if you look at Home Depot and Lowe’s earnings, you’ll see that what’s really slowing down is the things that people have to finance, the big projects, the big deck, the big new kitchen, things like that. And one of the big reasons for that is the higher interest rates have made tapping your home equity line a lot more expensive. We have this tremendous buildup of home equity, something like 17 trillion that people are sitting on, but they’re kind of prevented from tapping into that with interest rates. It could be seven to, I don’t know, into up above 10% for those sort of loans. So that’s really put the brakes on a lot of big project spending.

James:

We do a lot of different types of construction. We build new, we do renovation, we do apartment renovation. So there’s all different types of construction that we do. And it’s been kind of weird the last 12 months. We see little peaks and valleys in each different segment too. And where we’ve noticed the cost of construction on new construction, our pricing’s actually gone down about 10% year over year for our cost to build because it spiked up for a minute and we were building, I think around 300 bucks a foot and now we’re back down to 62 70 a foot. But the one thing we’ve seen increases on is the remodel cost, and it’s not the building materials, it’s the labor. The building materials have actually came down quite a bit to where you’re not really, you’re paying not too much more than you used to be.

Like lumbers came way down, HVAC equipment came way down, but the labor cost on the remodel side is still just exploding right now. I mean, I feel like every month that goes by, they’re charging three to 5% more really, and I think it’s more of a shortage of bodies, whereas the new construction, they have bigger teams, way more bodies and they have to keep ’em working. They don’t keep ’em working. They’re in the red. And so it is been kind of interesting to track. Have you seen a difference? Cost of construction has gone down, that’s building materials, but I’m still seeing labor starting to pop up pretty heavy still.

Ryan:

If you parse the construction spending numbers like the big picture stuff, what you’ll see is, I mean we’re still in the middle of an all time factory building. Boom. We’re building factories in America like we haven’t since World War ii, post World War II decades. A lot of that’s coming from, remember the Chips and Science Act and the Inflation Reduction Act that encouraged a lot of construction of things, of solar panels and things related to the energy transition and computer chips, things like that. But there’s also a company, I cover graphic packaging. They make your paper coffee cups and the boxes, your shoes or cereal or a 12 pack of beer come in, they’re building a facility in Texas that it’s going to cost more than a billion dollars. It’s going to take two years. I went to a factory they built in Kalamazoo. They had every electrician they could find in the lower 48.

Working on that project for a while. You couldn’t get a hotel room in Kalamazoo while that thing was going on. That construction, these big projects will really suck up a lot of that labor and especially the skilled labor. And so if you’re a construction worker and you can go get on a project like that and get a paycheck for a couple of years, you’re not going to be messing around with renovations and sort of odd jobs. You might turn to that when things go slower on the high end, but you have all this high end construction really consuming the labor and not really leaving a lot of people to do the small jobs around town. When I grew up, I grew up working at my parents’ hardware store and outside of Cleveland, and we would see that when times were good, you would’ve contractors coming in when money was tight. People come in and buy stuff and do stuff on their own and you could kind of judge the economy based on who was shopping. And you kind of see that on a grand scale with this factory building boom and the infrastructure that’s being built.

James:

Yeah, that’s kind of how it works. In my office, if I’m picking specs, that means we need to save money. I’m like, no, no, no. I’m on Amazon. You’re picking these specs. And if it’s good, I let the brokers and everybody pick whatever specs they want and it looks shiny and it costs a little bit more.

Ryan:

Yeah,

Dave:

We got to take a quick break, but stick with us more from Ryan Dezember when we return. Welcome back to On the Market podcast. We’re here with Ryan Dezember from the Wall Street Journal talking about home repairs. So Ryan, I’m curious if you could sort of break down some of the costs and trends for us, because when we’re talking about remodel, it’s a pretty big generalization. Are there any areas that are seeing a particular slowdown or any other types of renovations that may be remaining more resilient?

Ryan:

Really, the high end is coming down anything that needs to be financed and that’s interest rates. And you have to figure, a lot of people just built their dream deck in their dream kitchen the last few years. So the pandemic and the lockdown sort of sucked that demand forward. We haven’t really seen a big slowdown in the small projects painting a bedroom or building your garden boxes or whatever. Those small things are still happening and lumber’s way down from what it was. So if you could have waited to do a project, it’s going to be a lot cheaper now if you’re not paying for labor.

Dave:

I’m sort of surprised to hear this, Ryan, because I guess I was expecting that renovation trends would at least stay pretty stable right now given what we’re seeing with the market. Because with the quote lock in effect, we’ve seen transaction volume in the housing market go down by 40, 50%. And so the logic is that with fewer people trading up for new homes, trading down whatever, that they’re going to spend money or just try and improve their current living situation. Does your hypothesis or your research show that that sort of trend has run its course, people have already done that and now people are sort of content or they’ve run out of money due to inflation or what do you think the reason is?

Ryan:

Yeah, well, I think there’s a lot of people, probably just investors with the stock market waiting for interest rates to come down. The market’s basically all in on a September rate cut that’s basically priced into everything that’s assumed to be coming. That won’t dramatically lower cost for financing these projects, but that’s the start of it coming down. Maybe people put things back on the drawing board and start thinking about lining up those projects. Right now to your point, you have these people that are locked into homes and there are companies out there making a bet along the lines of what you said that they’re not going to move, they’re going to add on. We published a story not too long ago about a company called trx. They make that composite decking.

Dave:

Oh, I know it. Yeah, it’s awesome. It’s very expensive, but it’s awesome.

Ryan:

It’s like this amazing product of recycled material, very high end decks. These are decks that contractors are building. People aren’t messing around with a circular saw out back. This is pretty high end stuff. And they’re betting that demand will not slow on that high end that they’re looking around saying people are going to stay in place. There’s not a lot of homes for them to go to, so they’re going to tap their home equity, they’re going to build their dream deck with the kitchen and the outdoor living room, and to the point that Trex is spending something close to a half a billion dollars to build a new manufacturing facility in Arkansas to crank out more of this stuff. And you think about it, it didn’t make sense. That’s the cheapest way to add square footage to a house is to do it outside. The other thing that companies like that have going for ’em and contractors is that the American home is not getting any younger. On average, the American House is about 40 years old, so they’re in need of renovation. They were built to a different era. I don’t know how you guys grew up, but when I grew up as a kid, the houses that people lived in were much simpler, smaller, different designs with a lot of separate rooms, hallways, hallways are like a thing of the past now, all these different changes. So you’re going to see a lot of houses needing to be renovated, redone, regardless, major repairs.

James:

And on some of the remodeling in 2022, I think there was almost a record request for HELOCs because people decided, Hey, I’m going to stay in my homes and start renovating. And it seemed like we saw the spike in HELOCs getting pulled, especially for owner occupied because that was the only ones you could get 2020 2, 23. Now these costs of HELOCs have gone up quite a bit, where now investors are paying sometimes 10 to 12% for their heloc, and I feel like they’re all pulling ’em, but then they’re not using ’em, which is probably a good thing half the time where they have ’em, but then they want the rate to fall before they take on that renovation project. And I feel like the building’s kind of gone a little bit softer recently. We have a lot more contractors reaching out to us on the regular right now going, Hey, do you have more work? Do you have more work? I mean, I had some guy from four years ago, he reached out to me the other day, he’s like, Hey, I need some work. This is who I am. I’m like, yeah, I remember you stole $15,000 from me, what, four years ago? And I’m like, oh, hi Sam. How are you? He’s like, good, you got any work for me? I’m like, yeah, where’s my money? And he’s like, oh,

Dave:

He scammed so many people. He forgot that he scammed you. Yeah,

James:

Totally. And then I sent him back the no soup for you picture. I was like, don’t call me again. But we’re getting so many more phone calls, even when we post a coming soon sign trades are calling us, Hey, do you have work? Do you have work? But I do feel like the labor actually could jump again because I know probably I just know a ton of people waiting to do their renovation. They just don’t want to pay 12% for their heloc. So as soon as my HELOC goes back down to eight, 9%, I’m doing my renovation. And I do remind ’em like, you don’t understand this is floating half the time where even if you pull it at night, it could go back up. But I feel like there’s this, actually, we hear a lot about tsunamis. There’s a tsunami coming, there’s tsunami coming, but once those rates fall, people do pull the trigger quick. And I do feel like some of the renovations also slowed down just because the cost of money. Credit cards are expensive now. A lot of people were putting their home renovations on the big box credit cards, and it is double the cost almost on interest. And people are really thinking about it now, going, okay, I don’t want to pay this cost. And as soon as those rates come down, I do feel like people are just going to pull the trigger and start really renovating their house again.

Ryan:

That’s sort of like the question, the stock market with all the money and money market funds, it’s like how far down does the rate have to come before that levee breaks and all that money comes rushing back into the stock market? Or what rate is it where people that have been dreaming up their kitchen but they’re waiting for rates to come lower, and is it just that one token rate cut that shows that direction to your point where they’re counting on over time, the rate will come down and the Fed will keep chipping away at it. Is it one rate cut? Do they need to see it go to a full percent lower? Obviously the Fed funds rate is not what people are paying, so a quarter point reduction in that may be a larger reduction in what people would pay to tap their heloc. But that’s sort of the big guessing game that all these companies and the Home Depots of the world are looking at. It’s like, what is that psychological number where people make that decision and alright, let’s do it. It’s

Dave:

Complicated, but I always wonder if the average American consumer really follows the interest rates as much as we do because we’re all paid to do this in some way. And I get it that some people are saying, Hey, a 25 basis point cut is great, but at the end of the day for the average renovation is a 25 basis point cut going to really make that big of a difference, especially with inflation going up. You might be better off doing it now, even with a rate cut if supply costs might go up.

Ryan:

Right? I mean, using lumber is sort of a very cyclical one. Sawmills are shutting down from British Columbia to Florida. The price is just not, they can’t keep losing money in today’s prices. Well, it’s like all commodities are like that. It’s just oil oil’s high. Everyone drills an oil well, there’s so much oil, the price falls shut ’em all in. It’s this never ending thing. So if you’re not buying lumber now and you’re like, oh, it’ll keep going lower, well, at a certain point enough sawmills will shut down to balance the market and the price is going to shoot back up. So you’re sort of like, you might be waiting for the rate to come down a bit, but then your supplies might turn on the commodity cycle.

Dave:

Just another example of how impossible it is to time the market. There’s just too many complicated factors here that if you want to renovate your house, you should probably just do it.

Ryan:

Another thing that the Trex folks pointed out is that people that are doing really big stuff, especially older folks who are maybe retired or toward their end of their working life, the higher rates have been great for them. They’re making 5% on their savings. They haven’t had that in a decade or two. It’s like that could drive demand for things like fancy appliances and elaborate composite decks and outdoor swimming pools and things like that.

Dave:

We do have to take one more quick break, but more from on the market when we return. Welcome back to our show. Let’s jump back in. Ryan, I wanted to ask you, you’ve been talking about Trex super interesting company. And again, this is sort of a high-end lumber alternative wood alternative for decking. But you said that they’re expanding and they are building out a new manufacturing plant. In my mind that means more supply of this. Does that mean that there’s a chance these types of luxury or high end materials or any other supplies that real estate investors might be using could come down in the future?

Ryan:

It’s possible. I mean, that’s sort of the risk that Trex is running. Now. On the flip side, they, like many others did not see the pandemic prompting this huge remodeling boom. They almost ran out of product. They were sold out. And that’s terrible for a company because all of a sudden you’re getting replaced on the store shelves. You’re getting replaced in blueprints. You’ve lost that business in the south with that Arkansas plant. One thing they’re doing is trying, they’ve got a plant out west in Nevada. They’ve got one, their main one in Winchester, Virginia, and they’re trying to basically come into the south in the pine belt and compete with Southern Yellow Pine and get people to replace that. So that be’s sort of a market share wager, but they’re also, they’re going out and they’re expanding into a situation where most people think that that spending’s going to go down. They’re taking the other side of the bet. They’re saying, your house is old, you’re not going to move because rates are what they are and the supply of housing is short. You’re going to improve what you have.

James:

And at one point in Trax, I remember because I like Trax, but I don’t put in a lot of my projects just because it’s expensive. We put it in our nicer stuff and I would opt for Trex over a nicer wood, like an iron one or anything like that. It just lasts longer. But there was one point, it’s probably like 12 to 15 months ago where Trex was cheaper than Cedar and another decking. Wow. We would price out lumber versus Trex almost every time. And I probably installed seven or eight decks during that time where Trax was basically flush. Wow. If not a little bit cheaper. And now that was just a moment in time. I remember I was like, oh, let’s trax everything. And then especially on our rental properties, we were buying Trax it, it lasts a lot longer. I actually like to put it on our rentals because it’s way Lessed for maintenance, but I’m kind of questioning their bet now.

I know their Trex, it says their net sales went from 2 39 to 3 74 50 7% increase. When they’re talking about those sales growth, is that from back orders or is those all recent too? Because I felt like people were buying Trex a lot, but now they’re looking at ways to get their cost down and your typical wood deck’s going to cost you about 25% cheaper than Trax for materials. And depending on who’s installing it, some guys charge a lot more to install Trax, some don’t on their sales. Is that usually built up pipeline sales that they’re delivering on or is it pretty recent because I’m like, I wonder if there’s going to be a slowdown on that. No way. I’d buy Treks today. I’m already over budget on everything else. I can’t opt to go up on the deck.

Ryan:

Yeah, I think it’s a mix. I mean, they sell to the big box retailers, so there’s obviously a pipeline and an inventory that they’re watching there, but then they have this sort of network of contractors that they deal with who get a lot of stuff straight from them. So I think that ramp up, some of it may just be them catching up with the demand. They probably could have sold a lot more in 2020 through 2022 had they had full production. Now, their Winchester, Virginia facility went through a major expansion during the lockdown, and the company says without that they would’ve been in real deep trouble in terms of meeting demand, the overarching sort of bet that they have though is that lock in effect, that aging home, the aging homeowner and sort of that argument that, look, these people, they’ve made their money. They’re on their second or third deck.

They don’t want to be going to the hardware store and dragging that five gallon bucket of Thompson’s water seal every home, every spring or summer. And so they’re sort of betting that people will pay that. Now, the contractors I spoke to for that story, they were like, it’s a little harder to sell people on this stuff. We’re having to go back and hold people’s hands a little bit more and convince ’em no to now it’s the right time. But ultimately, they did fill up for the summer. All the contractors I talked to were booked for the summer. It took ’em a little bit longer to get booked. It wasn’t as crazy, but they did fill up this summer with work. So you mentioned Cedar and one of the companies that does a lot of specialty Wood, teal Jones, a closely held Canadian company that has a lot of sawmills in the south and some specialty mills up in Canada. They filed for bankruptcy protection this spring. And that’s kind of shocking because you think we just had $1,700 lumber where mills were just printing. So they put the money back in, invested in their business. They’ve got a mill under construction in Louisiana. Didn’t even make it to see it finished. So that’s sort of the risk of expanding into a declining market for this stuff.

Dave:

Awesome, Ryan. Well, thank you for sharing this information. But before we let you get out of here, do you have any predictions thoughts on where the home renovation industry might be going? Particularly any information that’s relevant for small to medium sized real estate investors?

Ryan:

I mean, we just got the housing numbers today and they looked good, but if you separate ’em and take out multifamily, there was an upturn in multifamily single family housing permits starts are down that segment. We would expect there to be more houses. There’s heavy demand, but I think if you go through and look at entitlements and land purchases and things, that next wave of home building is going to take a while. People are not going to wait. They’re going to be working on their homes. We have really two or three decades of evidence that this is just a boom industry. If you go back to after the housing crash, there weren’t a ton of industries that were doing well. Home improvement and renovation spending was one. And that really helped the American economy, the stock market, and that’s a really powerful force. And I think if we just get a little bit lower borrowing costs, you’ll see people start to come back in who have been waiting. So it’s hard to bet against, even though there’s signs of it slowing down. We might be in the slowdown now.

James:

Yeah, I think we are. It feels like we are, from a consumer standpoint, it feels like it’s slowing down and people need

Ryan:

Work. Don’t discount the effects of weather. We had a very wet spring in some parts of the country that slowed things down. That can have a big effect on the prices of things on labor like Houston, nothing’s getting done right now in Houston. Right,

Dave:

Right.

Ryan:

Yeah. Next month there’s going to be a lot of work going on in Houston. So these things can really warp the data. And so we really need a bigger view, a wider data set to really judge it. All

Dave:

Right, Ryan, well, thank you so much for joining us. We really appreciate your research and insight. We will link to Ryan’s stories about Rex and put all of his contact information in the show notes below. Ryan, thanks again for being here, and thank you all so much for listening for BiggerPockets. I’m Dave Meyer. He is Mr. James Dainard, and we’ll see you for the next episode. Very soon of On the Market.

Dave:

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.