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How Baby Boomers Will Grow the Home Improvement Market

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Baby boomer impact on the home improvement market may come down to a simple case of generational style differences.

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The home improvement industry peaked in 2007, well after the housing bubble burst, but before the financial system came crashing down. Back in those days, lenders like Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) urged borrowers to tap into equity lines of credit for home improvement projects (and practically anything else they wanted to spend the money on). But alas, housing values plummeted, foreclosures rose, financial institutions crumbled and many Americans minds quickly shifted from home improvement, to simply keeping up with mortgage payments. The Leading Indicator of Remodeling Activity (LIRA) released in April by the Joint Center for Housing Studies of Harvard University (JCHS) projects annual growth on renovations will slow throughout the year, with spending up only 0.2% in 2011.

Baby boomers, however, are an exception. They helped to propel the national homeownership rate to historical highs. These long-time homeowners have continued to spend on home improvement, using their established home equity. They've got power in numbers, and they're poised to make quite an impact on the home improvement market for years to come.

The actual population size of baby boomers is estimated to be between 76 and 79 million; the first baby boomer turned 65 in 2010. Over the next two decades, this massive demographic of Americans ages 45 to 64, will turn 65, and their lives will reflect all the changes that "retirement age" brings. As a result, their influence on future housing turnover will be widespread throughout our country's cities, suburbs, and rural communities.

While upper income homeowners' spending on home improvement has stalled with the housing market, older homeowners scaled back spending the least since 2007, according to the JCHS. While upper income homeowners are often hurt the most by falling prices, baby boomers have usually lived in their homes long enough to have established equity, making them less sensitive to falling home values. They tend to spend more of their improvement dollars on replacement projects and system upgrades; two categories whose demand has also fallen the least since 2007.

A strong housing market and home improvement demand generally work in opposition. When new construction is strong, spending on remodels and improvement projects lags. A weak housing market generally strengthens the renovation market, albeit just slightly in the current economy. "When housing markets crashed between 2005 and 2009, the remodeling share climbed to more than two-thirds of total residential investment," according to the JCHS. While it may take several years for the housing market to recover, the JCHS predicts that home improvement spending will increase by about 3.5 percent per year, until 2015.

Homeowners older than age 55 accounted for about one-third of housing turnover in the US between 1997 and 2007. As baby boomers hit retirement age in the next two decades, that figure will grow stronger. In turn, they will make lifestyle changes, either by moving, or updating existing homes to reflect their changed needs. Housing turnover generates home improvement activity; sellers make improvements to attract buyers, and buyers make updates after the sale to make a home their own.

Baby boomer impact on the home improvement market may come down to a simple case of generational style differences. Using longitudinal research by the American Housing Survey (AHS), conducted by the US Census Bureau for the Department of Housing and Urban Development, JCHS found that nearly 75 percent of homes sold by adults age 55 years or older are purchased by younger buyers. Younger buyers are attracted to the value and location of the homes. But there's a catch.

Trends indicate that older homeowners do invest in home maintenance needs, upkeep, or repairs required to sell a home, but are unlikely to partake in "trendy" upgrades desired by younger generations, like modern kitchens and baths. Further, those homes tend to be built before 1960, predisposing them to unavoidable spending on upkeep and renovations. Regardless, buyers of older homes are generally younger, and more likely to have a growing income and family. As a result, the housing turnover created by baby boomers over the next two decades will create a dual demand for home improvements, pre and post-sale.

Not all boomers are moving. Thanks to the economic downturn, many have been forced to alter or postpone retirement plans and stay in their homes. AHS data indicates that mobility rates among older homeowners took the sharpest plunge in the downturn. Yet aging boomers needs will change as they age; homes may require updates to provide appropriate accommodations.

Further, concerns around environmental issues and home energy costs will grow over the next several years, and retired boomers will likely need to make concessions to stretch retirement dollars further. Those who stay in their homes will be faced with ways to increase residential energy efficiency, by retrofitting existing equipment with more cost-effective solutions.

Where might the home improvement spending take place? According to the 2011 JD Power & Associates US Home Improvement Retailer Satisfaction Study, consumers ranked Ace Hardware, Lowe's (LOW) and Menards, as top in customer service. The Home Depot (HD) ranked near the bottom of the list.
No positions in stocks mentioned.
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