Houzz Economic Expert Shares 2023 Insights
NHPA spoke to Marine Sargsyan, staff economist at Houzz, to gain insight into 2023.
About Marine Sargsyan
Marine Sargsyan is a staff economist at Houzz, the leading platform for home remodeling and design, including the all-in-one software solution for industry professionals. She specializes in survey and data science, providing timely insights on national and international renovation market trends, confidence levels among industry professionals and homeowner motivations and preferences. Her team’s surveys, analytics and reporting initiatives covering home building, renovation and design offer unique perspectives drawn from Houzz’s community of more than 65 million homeowners and home design enthusiasts and over 3 million professionals.
Marine completed her undergraduate and graduate degrees in economics from the University of California. Her background includes extensive economic consulting experience in antitrust and intellectual property litigations.
North American Hardware and Paint Association (NHPA): What key trends did you see in 2022 in the housing market? Will those trends continue in 2023?
Marine Sargsyan (MS): We predict renovation activity will continue at a slower pace. The home improvement industry, especially residential renovations and design, has been relatively robust over the last eight years. During this time, more than 50% of homeowners across the country upgraded their homes undertaking large or small projects every year, according to our 2022 U.S. Houzz & Home Study. That said, we do not expect a major decline in the home improvement industry in 2023 and think that residential renovations will continue into 2023, though at a slower pace than we saw at the activity peak in 2021. In a recent Houzz study of homeowner activity, we found that the intent to renovate still prevails for 2023.
We also do not expect housing availability or people’s preferences to stay put to change. During the pandemic, there was a lot of discussion around mobility and people relocating, which can be a stimulator for renovation activity. However, our 2022 U.S. Houzz & Home Study shows that homeowners who have lived in their homes for a long period of time make up the largest share of renovating homeowners and a significant portion of them do not have intentions to move out of their current home.
This is a result of multiple factors. First, homeowners do not have a wide variety of choices when it comes to housing. Second, the current situation with mortgage rates forces homeowners to think very carefully about starting anew with higher rates. Finally, many homeowners suggest that they have a special attachment to their homes and therefore do not consider moving. As we do not expect major shifts in new housing availability and people changing their minds about staying put, we also think that this will be characteristic of renovating homeowners in 2023.
Cash from savings remains the No. 1 source of renovation financing. Over three-quarters (76%) of renovating homeowners used cash from savings to fund their projects in 2022, down 7 percentage points from 2021. On the other hand, the share of homeowners financing projects with credit cards increased by 6 percentage points and stands at 35% at the end of 2022. Other common forms of payment include secured home loans (14%) and cash from a previous home sale (10%). Depending on the size of a project, we expect this makeup of payment methods to continue in 2023.
Lastly, one of the driving factors for home renovation and design in the U.S. is the limited and aging housing stock. Nearly half of homes (46%) renovated in 2022 were built before 1981, meaning they were at least 40 years old. With older homes, many homeowners are investing in maintenance-related home system upgrades, including plumbing, electrical and heating. Regardless of home age, more than nine in 10 homeowners turn to home professionals for help with their projects. Depending on the complexity of the projects undertaken in 2023, we will continue to see many homeowners relying on professionals to upgrade their homes.
NHPA: How has inflation affected the market and how will it continue to affect the market?
MS: As has been widely reported, we’re experiencing inflation across all aspects of the economy. For homeowners, this means that products and services are more expensive, and their purchasing power has declined. Given that inflation has impacted all aspects of the economy at various levels, homeowners need to decide where their money is best spent. Consumer confidence in the economy has subsequently declined, bringing additional downward pressure on spending across the economy.
For industry professionals, managing business and customer expectations is challenging in this environment. According to our Houzz Renovation Barometer, which tracks residential renovation market expectations, project backlogs and recent activity among businesses in the construction sector and the architectural and design services sector in the U.S., professionals are expressing uncertainty around business activity and performance, particularly among professionals in the construction industry, which are typically sole proprietors or operations with up to four employees.
Luckily we are seeing some improvements in the consumer price index or inflation, which is showing some softening after its peak in the middle of 2022. If the trend persists, the initial negative impact we have been observing on home improvement activity can potentially see some relief. In addition, a 2022 Houzz survey of homeowners showed that, as of October, less than 1% of homeowners have canceled their renovation projects despite economic uncertainty. This, along with some stability in the otherwise volatile prices for products and materials, will be key for renovation activity in 2023.
NHPA: How has affordability changed this year?
MS: In recent years, affordability is a huge concern when it comes to housing due to the imbalance between supply and demand for homes. As shortages of available homes for sale persist, the housing market has been experiencing growth in prices as well as increases in mortgage rates this year, creating chaos across the country for both new builds and existing homes. With this price acceleration and mortgage rate increases this year, affordability became even less attainable. In 2021, we were finally seeing some activity on the supply side, where new homes were being built due to heightened activity in the industry. However, the economic conditions in 2022 slowed down home-building activity, pausing the potential alleviation in the market.
Again, a piece of good news in recent market reports is that we are seeing slight declines in mortgage rates. However, affordability continues to remain an issue and only has the potential to be achieved when mortgage rates drop significantly and the supply of homes continues to grow in order to bridge the gap between supply and demand.
NHPA: What are some short and long-term impacts of affordability?
MS: Affordability typically goes hand in hand with other economic factors and therefore is challenging to discuss in isolation. The recent easing in mortgage rates, including where the rate lands, which we have yet to see, may create some interest on the demand side of the industry. However, this alone will not solve the issue of affordability since the housing supply needs to meet the demand to make buying a home affordable for a potential home shopper.
On the supply side, the construction industry has been operating with heightened costs and supply delays in recent years. Product, material and labor costs will need to come down to make economics for home building work.
That said, when it comes to the home improvement industry, the lack of affordable homes will likely have a stronger negative impact in the long run than in the short run. One example of a negative long-term impact is the concern around skilled labor. As prices go up and people are forced to relocate to more affordable communities, a labor shortage is created in high-priced communities that could have otherwise benefited from the wider availability of services. We already are aware of shortages in skilled labor in the construction industry, and further economic drivers could make the situation worse.
In the short run, the lack of affordability will slow home buying and selling activity and potentially have an impact on residential renovation activity. Though, unavoidable upgrades such as plumbing, electrical, roofing and addressing ongoing wear and tear in the home will continue.
Finally, being priced out of the possibility to upgrade their homes, homeowners will continue to invest in their existing homes making them more suitable for various stages of their lives.
NHPA: How have housing trends impacted the home improvement industry this year?
MS: Housing trends and economic conditions around housing typically impact the home improvement industry, and this holds true today. This is not surprising as homes are the biggest ticket item many of us purchase during our lifetimes and renovations are among the largest investments homeowners make. That said, any shocks to the housing market as a whole have an impact on the home improvement industry.
As home prices and mortgage rates grew in 2021-2022, we saw that home affordability has been deterring people from moving into a new home and giving up their possibly lower mortgage rates. These factors made it more affordable for them to renovate their existing homes than to buy a new one. Our 2022 U.S. Houzz & Home Study showed that recent homebuyers, for example, who moved into their homes a year ago or less, tend to focus on personalizing and upgrading their living spaces to make their home their own. Homeowners who lived in their homes for a longer period of time and have older homes tend to fix the home systems, such as plumbing and electrical, and bring in home automation capabilities. Finally, those with newer homes focus on their outdoor spaces by making them more secure and transforming them into extensions of their interiors.
That said, the mentioned housing trends did not happen in isolation. We also faced inflation and prices for products, materials and gasoline created challenges for both home professionals and homeowners this year. On the demand side, homeowners, who typically tap into their savings when paying for home improvement projects, felt anxious about the rate of depletion of their savings, due to inflation. On the supply side, labor shortages and price volatility made it difficult for pros to commit to contracts with their clients.
Finally, our 2023 U.S. Houzz & Home Study, which we will release next year, will shed more light on the actual renovation and remodel activity in the industry. It will also provide insights into how homeowners financed and paid for their renovations and whether they relied on professional help at the same frequency as in previous years.
NHPA: What home improvement trends are you forecasting for 2023?
MS: In summary, renovation activity will continue at a slower pace and homeowners will continue to monitor economic conditions around the housing market and weigh in on their alternatives. Now that some easing in the inflation rate is reported, this change could give stronger purchasing power to homeowners and have a positive impact on the industry as a whole.
Additionally, we are closely monitoring the residential remodeling and design industry through our Houzz Renovation Barometer. Given the volatility and uncertainty in the economy, businesses in the construction and design industry will likely experience some short-term shocks to both inquiries and demand for their products and services. This, however, comes at a time when pros already have long backlogs and wait times reported at the beginning of Q4 2022. Backlogs are nearly 11 weeks in the construction industry, which is only a week shorter than what the pros reported in Q4 2021 when home improvement was booming. Finally, we expect supply chain improvements to bring some certainty in otherwise very volatile industry conditions.