Housing Segments and Segmented Remodeling

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Abstract

In 2019, home remodeling and improvement accounted for over $400 billion in annual U.S. investment. I show that this sizable investment in remodeling is also segmented investment: investment concentrates in the right tail of major remodels. Households making major remodels live in higher-quality homes within a housing market, as defined by their self-reported home values. Preliminary results show remodeling is both procyclical and price elastic, but that price elasticities vary between households with different mortgage payment-to-income ratios. A rise in house price indices by one percent raises remodeling propensities as much as a percentage point rise in leverage decreases them. These facts suggest credit markets play a key role in directing remodeling activity toward providing affordable housing stock and not toward properties held for investment purposes.