While new construction is critical in addressing the inventory challenges, experts say that may only partially fix the persisting housing shortage in the United States.
“Over time, aging housing is also likely to increase the rate at which homes deteriorate to the point of functional obsolescence—a factor that would further increase the need to build new housing to replace them,” says David Bank, senior vice president of Rosen Consulting Group (RCG).
RCG co-authored a June report, “Housing Is Critical Infrastructure: Social and Economic Benefits of Building More Housing,” with the National Association of REALTORS®, that painted a clearer picture of the nation’s decades-long underbuilding gap.
The study indicated that lagging new construction has left the market with a 5.5 million to 6.8 million housing unit gap. The growing number of outdated existing homes in the market that need renovation or rehabilitation is part of that mix, according to Bank.
Prior to the housing boom of the early 2000s and subsequent extended underbuilding, the report showed that one-third of the U.S. housing stock was more than 40 years old. By 2019, that number surged to more than 50% of housing units.
“The aging housing stock adds to the costs of homeownership because of the need for larger upfront investments in renovating properties after the initial purchase and greater ongoing maintenance costs for older homes,” Bank says.
Remodeling Opportunities
Despite the mid-summer improvement in housing starts and government intentions to add affordable housing options, experts believe that remodeling and rehabilitation of aging stock will also need to happen in order to address the housing crisis.
“New construction is not likely to keep up with demand and bring that median age down. That points to a lot of continued activity in remodeling in terms of replacement projects,” says Abbe Will, associate project director in the Remodeling Futures Program at the Joint Center for Housing Studies (JCHS) at Harvard University.
In a July report, the JCHS projected an uptick in homeowner improvement and maintenance spending through mid-year 2022. According to Will, nearly half of the home improvement spending goes toward needed replacement projects.
“We describe these as projects that you need to do at some point, like roof replacement and major equipment in the home like furnaces and AC units,” Will says. “You’ll see spikes in spending for that reason as the home ages.”
While the remodeling sector could be poised for a longer boom, real estate professionals will need to help their clients navigate markets with an abundance of older homes, according to Nick Warren, founder and CEO of Berkshire Hathaway HomeServices Warren Residential in Boston.
“It’s definitely not easy,” Warren says. “A lot of times, people have a hard time visualizing the potential of something. Even though we see renovations happen all the time, and properties get turned around, it’s still hard for people to have the vision.”
Warren thinks it’s essential to determine client preferences. He notes that providing examples of similar homes renovated to the client’s taste can mitigate concerns and apprehension.
Transparency with buyers is another critical component that Warren says agents should lean on when guiding their clients. That also includes helping clients manage their expectations and excitement of homeownership with the reality behind purchasing an older home that’s in need of renovations.
“You don’t want someone going into something completely blind because they just don’t have the experience, so you want to make sure they know that there are some major big-ticket items that potentially could cost tens or hundreds of thousands of dollars, especially in a market like ours,” Warren says.
Building relationships with investors may also be another worthwhile route , according to Carrie Little, managing broker of CarMarc Realty Group.
Along with seeing an uptick in buyers opting for a 203K loan to renovate homes, Little has noticed trends of investors buying and rehabbing long-vacant properties.
“Many investors are coming back to the rental and Airbnb market and using this opportunity to renovate older homes to give Chicago visitors an opportunity for their guests to experience older Chicago,” Little says.
Maximizing Space
Shifting housing preferences among different buyer demographics coupled with a dearth of undeveloped lots may increase investment in remodeling older existing properties, according to Robert Dietz, chief economist for the National Association of Homebuilders (NAHB).
“People want more space with more folks working, studying and exercising at home and all those factors,” Dietz says, adding that increased demands for more energy-efficient homes will also drive up investment.
Different trends have taken root in various markets, including an uptick in constructing accessory dwelling units (ADUs)—also known as granny flats, garage apartments and in-law suites—in high-cost markets.
“In surveys that we’ve done about remodelers, about a fifth of remodelers indicate that they have undertaken an ADU installation or construction into an existing home,” Dietz says. “The typical costs are around $150,000, and that can fit multiple forms—restructuring basements, attics or garages.”
According to a 2020 report from Freddie Mac, nearly 70,000 properties with ADUs were sold in 2019. The popularity continued into 2020 and 2021, according to Idaho-based contractor Amy Allgeyer.
“The demand for ADUs is definitely higher than it was a year ago and definitely higher than three years ago,” Allgeyer says. “I get calls from people who want to build an ADU every week.”
Working in Boise’s historic district, Allgeyer notes that she has completed several projects on aging and smaller homes for different clients looking to make more space on their city block properties.
“I get younger couples who are trying to offset rising property taxes so they want to build an ADU long-term rental,” she says, adding that she also gets orders from older homeowners looking to move family members and caretakers into the spaces as they age in place.
In other cases, Allgeyer suggests the demand is also driven by people looking for work or study space amid the pandemic.
“All demographics are looking at these as solutions to particular problems that they are facing,” says Allgeyer.
New Home, Old Foundation
Another option that has become increasingly popular in some markets has been teardown construction—demolishing an existing home to rebuild a newer property on the foundation.
According to Dietz, the NAHB estimates that up to 7% of single-family homebuilding comprises teardown construction instead of remodeling.
“I think that market share is likely to rise given the fact that you do have homes in enviable commuting locations like inner suburbs,” Dietz says.
According to Brian Stetler of Berkshire Hathaway HomeServices Fox & Roach, that’s been the case in markets across Pennsylvania.
According to Stetler, the trend started in the Gladwyn township and has continued to expand into suburban areas throughout the state as developers have entered run-down neighborhoods to buy properties.
For Stetler, his clients prefer new construction instead of renovated or remodeled properties.
“I have relationships with builders that will let me know when they are purchasing a property,” Stetler says, adding that he works with the clients and developers to get agreements signed before the demolition begins.
“This is the product that everyone wants right now,” Stetler continues. “Clients will pay much more for new construction per square foot than they would for a fully renovated home.”
Jordan Grice is RISMedia’s associate online editor. Email him your real estate news ideas to jgrice@rismedia.com.
