Mortgage rates, lower savings, home equity per household, and other housing market factors are impacting the industry.

By Elisa Fernández-Arias

Following a surge in home improvement spending during 2020-2022, overall kitchen and bath remodeling in 2023 is slowing in the face of several persistent economic challenges – decreases in household savings, elevated mortgage rates and a decline in consumer sentiment regarding personal finances. 

NKBA’s recently released 2023 Kitchen & Bath Market Outlook Update, however, reports that some consumer segments are more upbeat about their personal finances and are moving forward with 2023 kitchen and bath remodeling plans. And the longer term kitchen and bath remodeling outlook remains strong due to millions of homes entering prime remodeling years, elevated levels of home equity and pent-up demand from projects being deferred until economic conditions improve.

Homeowners and K&B Remodels

About 80 percent of outstanding mortgages are locked in at rates below 5 percent, which is far lower than current rates and driving these homeowners to stay put and remodel vs sell. Another factor impacting homeowners’ shift toward kitchen and bath remodels is the increase in home equity per household.

Homeowner equity is also at record levels: $333,000 in Q1 2023, an increase of $59,000 since 2019 (adjusted for inflation). With 22 percent more equity in their homes today vs pre-pandemic, some homeowners are choosing to remodel their kitchens or baths despite uncertain and challenging economic conditions.

Home equity gains have been driven by home price appreciation since 2012, with Miami showing the biggest gain at 200 percent.  This is followed by Tampa (191 percent), Las Vegas (176 percent), Orlando (172 percent) and Atlanta (166 percent). The gains persisted despite some home equity lost to declines in home values since 2022, especially in the West.

Despite these gains, cash-out refinances have declined because of rising rates, temporarily depressing short-term demand for remodeling. However, once rates have normalized, some who have been waiting to take out these loans will do so, freeing pent-up remodeling demand.

Difference Among Income Tiers

Highest income tier households are less sensitive to mortgage rates and continue investing in luxury kitchen and bath remodels. Only 14 percent of funding sources for kitchen and bath repair and remodel (R&R) projects were tied to rates for these households, with annual household income greater than $160,000.  This compares to 20 to 28 percent for households in lower income tiers.

Households with higher incomes were also feeling more optimistic about personal finances compared to six months ago. Sentiment was 100 out of 140 in May 2023 for households in the top third income tier, up from 85 in December 2022. For those in the middle income tier, sentiment was also up to 87 from 74. Households in the bottom third income tier, however, showed a drop in sentiment to 71 from 73.

A Deeper Dive 

To learn more about these and other insights from NKBA’s midyear 2023 K&B Market Outlook, download the full report here.

This article is the second in a series of articles about the midyear 2023 K&B Market Outlook, with the third installment scheduled to be released next week.

Much has changed since January when the 2023 K&B Market Outlook was initially released. 

By Elisa Fernández-Arias

NKBA released its 2023 Kitchen & Bath Market Outlook Update this week, which revises the forecasts made in the baseline report released in January. Since then, mortgage rates have remained elevated, but inflation has fallen and the economy and the job market continue to outperform expectations.

The report was publicly released on July 13 and is available free to NKBA members here. Key takeaways include:

1. Residential K&B spend is expected to fall 5 percent to $179 billion in 2023 — below the record highs of 2022, but above pre-pandemic levels. The mid-year outlook is more positive relative to the earlier baseline due to an uptick in demand for new homes during the last three to four months.
   
   
2. The long-term outlook for K&B remodels remains strong. This is due to several factors: an additional 2.2 million homes entering prime remodel years in the next five years; homeowners sitting on record levels of home equity; and repair and remodel (R&R) projects being deferred beyond 2023.
   
   
3. Homeowners with lower mortgage rates are incentivized to remodel versus sell. About 80 percent of outstanding mortgages are locked in at rates below 5 percent, which is far lower than current rates and driving them to stay put.
   
   
4. New construction K&B spend is forecasted at $111 billion in 2023, a decline of 4 percent from the start of the year. This forecast is more optimistic than the earlier baseline prediction of $96 billion, primarily driven by a 10 percent decline in housing starts.
   
   
5. Our forecast for repair and remodel spend is $68 billion, a decline of 8 percentage points from the beginning of 2023. The decline is in large part due to high inflation, which continues to erode excess household savings, which was the primary driver of R&R spending during the pandemic. Higher interest rates have also made it less appealing to tap into home equity, diminishing another source of R&R funding. One bright spot, however, is that higher income households are less rate-sensitive and continue investing in luxury K&B remodels.
   
   
6. Professional spend in 2023 is expected to fall 5 percent, while DIY declines 7 percent. Since the PRO spend measure includes new home construction, this decline is forecast to be smaller than DIY because of the recent surge in new construction. We also forecasted that $154.9 billion of PRO spending will be driven by new construction and high-spend remodels in 2023.
   
   
7. Housing units under construction remain elevated at 1.7 million, and are expected to drive demand for K&B installs in new construction. And despite improving cycle times, under construction units are at record levels.
   
   
8. With one million multi-family units under construction, the share of multi-family units will increase in 2023 and temper K&B spend. The forecast number of multi-family units for late July is 994,000 and is 695,000 for single-family units.
   
   
9. Household savings rates have significantly declined from pre-pandemic era-highs and remain below pre-pandemic levels. As a result, the excess savings that helped the remodeling boom has decreased significantly and is trending lower.
   
   
10. The risk of recession remains. The probability of a recession over the next 12 months remains elevated at 61 percent, according to the Wall Street Journal Forecasting Survey. And the Fed could implement another one to two rate hikes this year to achieve its target of 2 percent inflation, which would likely slow down the economy.
    

To download the full report, click here.