The remodeling market will have to examine new areas of growth to sustain itself as the economy recovers.

No one will be surprised to learn that the home improvement industry is going through a severe downturn. With concerns of job losses, pay cuts and dwindling retirement income, consumers are holding on to more of their cash.

Falling home prices reduce the amount of equity owners have in their homes and discourage home improvement spending, even if homeowners could obtain a home equity loan with tighter credit standards. In addition, the threat of foreclosure not only affects one particular homeowner, but all neighboring property owners as well - a growing number of vacant properties in an area may prompt fear of declining home values in other homeowners, hindering them from making improvements to their own homes.

But there is some good news on the remodeling front, says the Joint Center for Housing Studies (JCHS) at Harvard University in its report titled “The Remodeling Market In Transition.” Today’s homeowners are likely to focus any remodeling spending on projects that will increase energy efficiency, generate cost savings and maintain the structural integrity of their homes.

The report notes that the home improvement industry cannot rely as heavily on upper-end discretionary projects - such as kitchen and bath remodels, and room additions - to drive future growth. However, it indicated three areas that are most likely to boost improvement spending: the emerging interest in sustainable remodeling projects; the increasing need to upgrade the rental housing stock; and the ongoing growth in the immigrant homeowner market.

Sustainable Remodeling Reinvigorated

The volatility of the oil market combined with growing concerns about global warming has helped to reinvigorate the sustainability movement, the report states. The energy efficiency of homes has become a central focus since residential homes are major contributors to national energy consumption.

Homeowners can improve energy efficiency by upgrading their HVAC systems, replacing appliances and lighting systems, and enhancing the insulating properties of a home’s exterior. Space heating and air conditioning account for almost half of residential energy consumption, water heating about 20 percent, and appliances and lighting at 32 percent, states the U.S. Department of Energy.

In 2007, U.S. homeowners spent $52 billion of their home improvement expenditures on energy-related projects.

But sustainable remodeling goes beyond energy efficiency. “Motivated by broader environmental concerns, consumers have demonstrated a growing interest in products and projects that meet three additional green goals: quality and durability, environmental performance, and safety and disaster mitigation,” the report explains.

A recent JCHS survey found that remodeler respondents were no more likely to install energy-efficient products for their clients than other products promoting the other three “green” goals. When asked which green products their consumer clients have expressed interest in, there were no real differences between energy-efficient products and those that meet other green targets.

Future growth will also be aided by younger age groups, which have high interest in green projects.

Reinvesting In Rental Stock

The number of renter households fell from almost 36 million in 1994 to less than 33 million in 2004, at the same time when homeownership rates were soaring, the report says. Shrinking demand meant rental owners didn’t invest in their properties, and developers were dissuaded from building new units.

But the recent collapse of the for-sale housing market has increased the demand for rental housing because: 1) homeownership has become less attractive; and 2) many owners are losing their homes to foreclosure. With this stronger demand should come greater investment in the country’s aging rental stock, the report states - nearly half of rental units were built before the 1970s, and only 15 percent have been built since 1990.

Aging, neglect and the normal wear-and-tear of high turnover rates have contributed to the deterioration of the rental stock. In 2007, more than 3.6 million units of rental housing (almost 10 percent) were structurally inadequate.

Improvement spending for this market is focused on replacements and system upgrades since it is difficult to structurally modify rental units, the report notes. Higher turnover rates also mean more spending on maintenance and repairs.

But despite this need to reinvest in the nation’s rental stock, the report cautions that current housing market conditions are likely to delay the process. “Overbuilding in many metropolitan areas has produced a glut of vacant for-sale units, as well as empty homes held off the market until conditions improve. Until this excess inventory is absorbed, many of these homes will be at least temporarily converted to rentals.” The result is reduced rents and diminished demand for older units, which discourages rental property owners from making improvements in the near term.

The Growing Immigrant Market

In 2007, foreign-born households spent a lot of money on improvements to their homes, to the tune of $23 billion. “Immigrants are key to the future growth of the U.S. home improvement industry,” the Harvard report states. “Their spending levels have grown almost 13 percent per year since 2000 - well in excess of the 7 percent among the domestic-born population.”

A large part of this growth comes from the steady increases in the number of immigrant homeowners. But a better reason for their spending strength, the report says, is their age distribution: “Immigrants represent more than 20 percent of the population between the ages of 30 and 44, the years when families are typically growing, when space is at a premium, and when households may be inclined to modify the use of space in the home. This age group traditionally spends heavily on home improvements.”

Between 2000 and 2005, the foreign-born population grew by just 1.1 million a year, accounting for about 40 percent of total population growth over that period. The Census Bureau’s recent projections indicate their share of growth will expand to 44 percent by 2010 and almost 50 percent by 2025.