After the pandemic hit in 2020, a lot of people’s lives were transformed. One of the key changes in the daily routine was working from home. Americans had a lot of free time on their hands and could only spend it at home, which encouraged the boom on home renovation projects all over the U.S. On the other hand, historical low prime rates meant that financing these home renovations projects was cheaper than ever. We will discuss all of these factors and more in the following article.
The trend in home renovation projects has seen a plummeting and a boost since the start of the COVID-19 pandemic. When the pandemic first started, in March 2020, a lot of remodeling contractors said that they experienced delays and cancellations of projects, according to the Farnsworth Group’s first-quarter 2020 Contractor Index Survey. With the rapid spread of the virus, many people did not want to have contractors in their homes, which might have been one of the reasons for the sudden decrease in demand. However, this did not last for long. Once the lockdown started to look a lot more permanent, people began exploring ways in which they could renovate their homes. This trend has continued upward since then, and experts say that it is not over just yet.
According to Harvard’s Joint Centre for Housing Studies, in 2020, spending on home improvement and repair grew by 3% to $420 billion. Some of the researchers believe that in 2021, it will grow by 4%.
This immersive growth can be explained by multiple factors, which mainly relate to the change in people’s lifestyle during the pandemic and the opportunities offered by the new economic environment. Some of these factors include:
1) Remote Work
As people’s routine changed and they no longer used their home just as an environment to relax but also as a workstation, office-like furniture from Ashley became a priority. While the busy daily lives of many may have not allowed them to even notice aspects of the house that need to be redone, replaced, or remodeled at first, staying at home 24/7 allows for these inconveniences to come to light. Moreover, to be effective and productive in their work at home, people need to make sure that their home environment is a suitable place to work. This can include projects such as building a home office, rearranging and remodeling some parts of the house to let more light come in, etc.
2) More free time at home
With multiple stages of lockdowns, apart from working from home, people also had to spend the rest of their leisure time there, since restaurants, bars, shopping malls, and other facilities were closed. Many saw this as an opportunity to make their dream renovation projects come true, now that time was all they had. This free time at home encouraged people to start all the projects that they had put off in the past like giving new colour to walls using ralph lauren paint or making patios to do house parties.
3) Low Prime Rates
Many home improvement projects come at a high cost. In the U.S., it costs Americans on average more than $22,000 to remodel the kitchen, $10,000 to remodel the bathroom, and replacing the flooring for a 1000 square foot home costs approximately $10,000. With these hefty prices, many people turn to home improvement and home construction loans to fund their projects. It is important to distinguish between these two loans.
Home improvement loans are used specifically for renovations and repairs around the house. There are different types of loans that can be used for home improvement such as Home Equity Line of Credit Loans (HELOCs). These loans have typically variable interest rates, and we will discuss how this is an advantage below. On the other hand, home construction loans are used to build a house from the ground up. Through a construction loan, one receives portions of their loan during the construction period until the project is finished. At this point, the borrower can decide whether they would like to refinance the loan or pay it back in full.
What is interesting about construction loans, is that you have to make interest-only payments up until the construction project is completed. To calculate the payments on a construction loan, you would need to know the exact terms of your loan and how long the construction project would last. Just like HELOCs, home construction loans have variable interest rates as well.
In periods of economic downturn, such as the one caused by the COVID-19 pandemic, the government lowers the Fed rate. The Fed rate affects the Prime Rate, which is the interest rate that banks offer to their most creditworthy customers. This happens because the Prime rate is calculated as the Fed Rate plus a margin decided by the particular bank. In turn, the Prime Rate serves as an underlying basis for the variable interest rates charged by banks on variable-rate loans, which include home improvement and home construction loans.
Therefore, historical-low prime rates during the pandemic resulted in low variable interest rates on loans, making it more affordable for people to complete their home renovation projects. Low variable rates mean that people do not have to pay as much interest as before for the amount of money they borrow from the bank.
4) Rising house prices
As house prices continue to rise across the country, homeownership becomes less affordable for a lot of Americans. One of the only affordable alternatives are fixer-uppers, homes that you can live in but that need repairs to be put in their optimal condition. Fixer-uppers come at lower prices which makes them budget-friendly, however, the repairs required might prove to be a very expensive investment. The rising house prices and the low-interest fees on home improvement loans make fixer-uppers a viable alternative in today’s market for first-time homebuyers.
Moreover, investors and those who want to sell their homes, see that there is a potential for great returns if they increase the value of their homes by renovating them. Since home improvement loans are cheaper than usual, now is a good time for homeowners to undertake these projects and earn more when selling the house.
5) Increasing cost of goods
The pandemic interrupted the operations of many companies. Goods’ import, export, and general distribution channels faced a lot of delays. This situation combined with the increase in demand for the goods needed to renovate houses increased the price of these goods. This factor worked against the home renovation boom. With lumber and semiconductor chips’ prices surging, the cost of many home renovation projects increased. However, the trend shows that increasing prices of goods did not have as big of an impact on the boost of home renovation projects across the U.S.
In conclusion, the pandemic, and the economic environment during it, gave reason to lots of Americans to want to renovate, improve and repair their houses. This, together with the low-interest rates caused by low prime rates created the perfect conditions for people to accomplish their home renovation goals. Having a lot of free time in their hands which they can only spend at home combined with the opportunity to finance these DIY projects at low cost, make for a great incentive to continue improving your home before the economy fully recuperates.
