Remodeling Skyrockets as Sellers Face Triple Hurdles to Trading Up
Rising prices, almost no inventory of homes available to buy, and a love of old 3% mortgage versus a new one near 7, makes trading home a challenge.
That’s why remodeling is forecast to grow in 2025, according to Harvard University’s Joint Center for Housing Studies.
The forecast is for modest growth of about 1.2%, but that’s on top of the steep, double-digit jumps during the COVID pandemic.
The cost of trading homes is prohibitive for many, and so the next question is how much it costs to make our current home just as nice as a new one. The answer is a lot, with labor and material costs skyrocketing, but still a better option for many compared to home buying.
The three home buying obstacles are commingled, each helping to make the others worse.
High Interest Rates
A majority of homeowners have pre-2022 mortgages between 3-5%, before the Federal Reserve began attempting to tame inflation by raising interest rates. Two years later, rates are 6.75 to 7% based on today’s market.
To trade up to another home, these owners would lose their low rates to buy at the higher rates. This creates a lock-in effect, where homeowners decide to stay where they are and hang onto the low rate. Earlier this month, Morgan Stanley reported that fewer homes are trading than at any point in the past 40 years, and the wide gap between old mortgage rates and new will keep a lid on inventory well into 2025.
Low Inventory
The low inventory of homes for sale has the knock-on effect of making those buyers who are in the market pay higher prices to get their piece of the short supply. Its simple supply and demand, so many buyers face multiple bid scenarios and must offer well over an already inflated list price to secure their desired home.
High Income Prices
Prices in the Chicago area have been rising 6-8% since last year. Those increases are lower than the pandemic era’s increases of 10% or more every month from August 2020 to July 2021, but it’s still sustained growth undermining affordability. And it’s coming when interest rates are twice what they were in 2020 and 2021, adding hurt to hurt.
Who’s selling then? Many sales today are driven by death, divorce, or life events like having more kids. But if you don’t have to move, why would you?
There’s been an increase in remodeling to add a ground-floor master bedroom suite, something an aging household would more typically gain by moving to a ranch house or single-level condo. Also, entertainment options that are more commonly found in the basement are being built on the first floor, to keep them accessible to people who can’t or don’t want to use stairs as much as they used to.