As the Economy Takes a Hit, Home Improvement Hits the Brakes

In the last several years, economic circumstances have led to unprecedented trends in American spending habits. The discretionary spending landscape, in particular, has been defined by fast-moving feast or famine conditions. Of course, one of the largest classes within this category is home improvement.

Immediately following the onset of the pandemic, many Americans found themselves trapped at home with an excess of income and stimulus cash but few outlets to spend it on. It was the perfect storm for the home improvement market, spurring a 20 percent increase in spending through 2020 and 2021. However, this rapid surge in demand coupled with persistent shipping delays became a major driver for runaway inflation.

As prices soared ever upward, the Fed took action to mitigate inflation, pushing benchmark interest rates up 5.35 percent in the last 14 months to their highest levels in 16 years. Now, discretionary categories like home improvement have seen massive cuts as Americans tighten their tool belts.

Let’s look at how this spending slump has affected both the storefront and service side of the home improvement sector.

The Retail World at Large

Recently, we’ve witnessed a dramatic dip in the retail side of home improvement. A couple of weeks ago, Home Depot announced its worst earnings miss in the last 20 years. After a meteoric three-year run, the massive retailer saw sales slip by 4.5 percent, income fall by 6.4 percent, and revenue drop by 4.2 percent.

While Lowe’s hasn’t experienced earning woes at the rate of Home Depot, it still slashed its full-year outlook on falling lumber prices and decreased discretionary spending on big-ticket items.

The revenue misses and outlook anxiety experienced by these major home improvement retailers says a lot. This looming “discretionary recession” could certainly have greater implications across the economy.

The Renovations Realm in Dallas

Ashley Rader, principal of Rader Renovations, has helped homeowners in the Dallas area complete incredible home improvement projects for over 20 years. She, like so many others in this industry, is concerned over looming economic uncertainties. However, she’s optimistic when it comes to the Dallas market.

“We’ve certainly seen a noticeable change since 2019,” said Rader. “Thankfully work remains steady but the phones really aren’t ringing at all as much as they used to. I think we’re all feeling what might be around the corner. I think work is harder to come by. Thank goodness we’ve been here awhile, but yeah, even our trades are getting a little concerned about going into next year.”

On the upside, Dallas boasts some of the best economic conditions in the country. With the fifth fastest-growing economy in the U.S., Rader feels we may be insulated from the absolute worst.

“I feel like Dallas is one of the only cities that hasn’t been completely affected by this economic uncertainly,” said Rader. “I just feel like our economy is moving at such a rate that people may not be feeling this recession as much and in turn aren’t as concerned with spending or future conditions.”

Forecasting The Future

If we’ve learned anything about the trajectory of the home improvement market, it’s that it runs pretty parallel with the broader economy. Since it’s based on discretionary spending, fluctuates with material costs, and encompasses both goods and services, it’s an excellent indicator of general economic health. There are also technological drivers like emerging smart home solutions and eco efficiencies, which further affect growth rates.

Thankfully, the Fed is expected to ease up on interest rate hikes at some point in the near future. This will not only make it easier to borrow for home improvement projects but will also increase consumer sentiment. Will we witness the demand surges of 2021? Probably not. However, as home innovations, aesthetics, and efficiencies improve, there will be new avenues for improvement and opportunities for growth.