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The Nation's Housing

Equity Growth Fuels Fix-Ups

By Kenneth R. Harney
Saturday, January 22, 2005; Page F01

The equity Americans own in their homes has grown by a mind-blowing $5 trillion since 1995, thanks to a 70 percent average jump in the values of those houses.

Guess what they have been doing with that wealth? Right: Buying cars, buying vacation property, paying kids' tuitions, taking overseas vacations.

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But some of them, according to new research, have been plowing that value back into their homes at a dizzying pace -- nearly one-quarter of a trillion dollars toward home improvements each year. Those improvements usually help pump up home values even more.

Rather than the modest fix-up and do-it-yourself remodeling typical of decades past, owners are focusing on high-end kitchen transformations, multi-room additions, lavish bathrooms, spas, entertainment rooms and other upscale renovations. Think big ticket.

Baby boomer homeowners -- those born between 1946 and 1964 -- are especially prone to think and spend big. Six in 10 of them completed a home renovation project in 2003, and they spent a prodigious $72 billion feathering their nests. That accounted for more than half of all remodeling spending in the United States that year, according to a new report by Harvard University's Joint Center for Housing Studies.

Generation Xers, those born from 1965 to 1974, are rapidly catching up. From 1995 to 2003, the number of Gen Xers who own homes tripled, and their remodeling expenditures rose more than fivefold. Already, they are beginning to rival baby boomers in average per-household spending on renovation.

But there's a key difference in the way boomers spend on home improvements compared with the Gen Xers: Boomers not only spend more, they delegate more, relying on professional contractors. Forty-one percent of Gen Xers' home improvement spending goes toward do-it-yourself projects, but barely 26 percent of boomers' outlays involve any form of do-it-yourself elbow grease.

And who said Gen Xers are slackers?

The new Harvard study, which focuses on the country's recent home improvement boom, also sheds light on demographic and social stratification patterns. Renovating your home, it turns out, says a lot about who you are and what you already have:

• The gap in incomes between households at the high end of the wealth spectrum and those at the low end is widening steadily. The average income of the top 20 percent of households is now 15 times that of the bottom 20 percent. In 1975, by contrast, the gap was less than 9 to 1.

• Ninety percent of American households with incomes in the highest quarter own their homes versus 49 percent of those in the lowest quarter. Even among homeowners, the disparity between high-income and low-income households is vast. While only one in four homeowners is in the top 20 percent of all income earners, upper-bracket owners spent $69 billion on remodeling in 2003, nearly half of all home improvement spending in the country that year.

• Minority and immigrant families are relative latecomers to the American home equity party, and account for barely 15 percent of all home improvement spending. But they represent the cutting edge of new homeownership growth: They were 35 percent of all first-time buyers in 2003, and they're likely to play steadily larger roles in housing renovation investments in the years ahead.

• Home equity growth among all categories of homeowners has powered consumer spending in recent years, and greatly softened the impact of the recession of 2001-2002. Not only does home equity produce a psychological "wealth effect" on owners -- giving them confidence to buy goods and services -- it also produces ready cash. Homeowners pulled out $333 billion in home equity via cash-out refinancing between 2001 and 2003 -- nearly triple the level of the preceding three years. One-third of all cash-out proceeds went toward home improvement.

• Homes in the highest-cost bracket -- those valued at $400,000 and up -- represent 11 percent of the total owner-occupied housing inventory. But the owners of those homes completed more than 800,000 room additions in 2002-2003, roughly 43 percent of all expenditures in that category. The same 11 percent of high-cost homes accounted for disproportionately large shares of all kitchen remodeling (33 percent) and bathroom makeovers (32 percent).

But don't ask the owners of those high-priced houses to do much in the way of fix-ups on their own. Of the $40 billion they spent on improvements in 2003, 85 percent went to professional contractors. Owners of homes worth $100,000 or less, by contrast, were far more active do-it-yourselfers, spending more than one-third of their remodeling dollars that way.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

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