REAL ESTATE TOPICS...'Nesting is investing' as home improvement spending set to hit $321 billion

Bu Diana Olick

Home equity is back, and headed for the bathroom — or the kitchen or the garage or wherever today's homeowners see the greatest returns.

Higher home prices have given people cash back and they are putting that cash to work in more — and bigger — remodeling projects.

Growth in home improvement and repair expenditures will reach 8 percent by the start of 2017, according to a new report from Harvard's Joint Center for Housing. That is far beyond its 4.9 percent historical average.

"By the middle of next year, the national remodeling market should be very close to a full recovery from its worst downturn on record," said Abbe Will, research analyst in the remodeling futures program at the Joint Center. "Annual spending is set to reach $321 billion by then, which after adjusting for inflation is just shy of the previous peak set in 2006 before the housing crash."

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A couple works on home renovations.

Increased home equity is certainly playing a large role, as are near-record low mortgage rates, which are enticing owners to refinance and potentially pull cash out. In the first quarter of this year alone, homeowners gained a collective $260 billion in additional home equity, thanks to higher home values, and with that increase, 38 million borrowers now have at least 20 percent equity in their homes, according to Black Knight Financial Services.

Confidence is also key. When people feel better about their home's value, they are more apt to invest in it.

"I call it 'nesting is investing.' People are saying I want to do something that adds to the value of my house, and I'm just going to fortify the castle," said Brad Hunter, chief economist with HomeAdvisor, an online home services marketplace.

And what fortifies the castle best? Kitchen and bath remodels are always popular, but Hunter points to less sexy insulation, as yielding the largest returns. He also said service requests on HomeAdvisor for multiroom remodels are up 67 percent from a year ago.

"We could see percentage growth rates in the remodeling and home- improvement sector that exceed those for new home construction in the next few years," Hunter said.

At least one-quarter of remodeling firms across all sectors report seeing more clients taking on multiple projects at the same time, according to another report from Houzz, also an online remodeling services firm.

Nesting is not the only thing driving home remodeling. As home sales pick up, they fuel fresh finishings as well.

"As more homeowners are enticed to list their properties, we can expect increased remodeling and repair in preparation for sales, coupled with spending by the new owners who are looking to customize their homes to fit their needs," said Chris Herbert, managing director of Harvard's Joint Center.

No matter the reason, growth in remodeling is a boon to retailers like Home Depot, Lowes, Sherwin Williams and Masco — and of course their stocks. Consumers are not only doing more renovations, they're spending more on them. With homebuilders still producing far fewer homes than are necessary to meet demand, owners of existing homes are trying to make them new again.