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January 18th, 2013

LIRA points to robust remodeling activity ahead

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iStock_Blue PrintsThe post below was written by HSH.com contributing writer Poonkulali Thangavelu.

With the housing sector finally recovering, remodeling activity is on the uptick too.

According to the Leading Indicator of Remodeling Activity (LIRA), put out by Harvard University’s Joint Center for Housing Studies, remodeling activity was up more than 8 percent over the last four quarters.

Furthermore, the leading indicator anticipates that remodeling activity is poised to pick up by nearly 20 percent through the third quarter of 2013, compared to activity seen through the third quarter of 2012.

“It’s encouraging to see the residential sector finally contribute to growth in our economy,” said Eric S. Belsky, managing director of the Joint Center for Housing Studies, in a release. “Through the first three quarters of 2012, investment in the residential sector was responsible for one out of every six dollars added to our GDP. Moving forward, home improvement spending is expected to make an even larger contribution to GDP growth.”

What does LIRA count as remodeling?

The LIRA uses Department of Commerce data to project the value of residential improvements, including:

  • Additions to residential structures
  • Finishing of basements, attics, etc.
  • Improvements to existing rooms such as kitchens, bathrooms, etc.
  • Outside improvements, such as the addition of a swimming pool
  • Replacement of major home systems and equipment, including water heaters or central-air units

However, LIRA does not use input on this sort of remodeling activity on any rental properties. Routine upkeep, such as painting and landscaping, is also not factored in.

Other indicators influence LIRA

In order to project a reliable, near-term outlook of remodeling activity for upcoming quarters, LIRA also uses eight correlating economic indicators. Those indicators include:

  • The National Association of Home Builders’ Remodeling Market Index, which includes expectations about future activity
  • The National Association of Realtors’ Pending Home Sales Index
  • The Federal Reserve’s 30-year Treasury bond yield
  • Bureau of Labor Statistics’ number of people employed by remodelers
  • U.S. Census Bureau’s single-family housing starts, its index of retail sales, and its manufacturers’ shipments of building and construction materials dealers
  • Institute of Supply Management’s Purchasing Managers Index

Recent input from some of these components have been very positive. For instance, the NAR’s Pending Home Sales Index was at its highest level in more than two years. The Census Bureau reported earlier this month that housing starts were up a little over 12 percent in December and jumped almost 37 percent compared with December 2011 levels.

Challenges remain

While LIRA points to robust remodeling activity ahead, risks still remain.

“There are many external economic and political risks that could derail this remodeling recovery,” said Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies, in a release. “However, the solid momentum behind home building activity, existing home sales, low financing costs, and remodeling contractor sentiment all point to a solid start to the new year for home improvement spending.”

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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