The U.S. home improvement industry is complex, with a number of dynamic yet interrelated factors — including everything from the state of the housing market to changing demographics of the population — driving trends. So what can we expect in the year ahead knowing what we know? Let’s take a closer look.

Overview

First, the good news: according to the Home Improvement Research Institute (HIRI), total home improvement products sales are forecasted to rise by 4.4 percent from $318 billion in 2015 to $332 billion in 2016. This is consistent with 2015’s estimated 4.4 percent home improvement product sales growth while outpacing forecasted 3.1 percent growth for consumer spending in 2016.

 

Now the bad — or at least, ambivalent — news: while home building and existing home sales did show strength in 2015, the numbers so far have fallen short of expectations. And while it’s hard to say with any real certainty what this means for 2016, it’s worthwhile to keep in mind that there is a direct correlation between the housing industry and the outlook for the home improvement market.

 

Still, it’s looking more promising than not. While residential improvement spending lapsed midway through 2015, Harvard’s Joint Center for Housing Studies’ (JCHS) Leading Indicator of Remodeling Activity (LIRA) recently predicted that spending for home improvements would accelerate to four percent within the first quarter of 2016 alone. Said Chris Herbert, Managing Director of the JCHS, “Recent homebuyers typically spend about a third more on home improvements than non-movers, even after controlling for any age or income differences, so increasing sales this year should translate to stronger improvement spending gains next year.”

 

Other factors indicating a robust home improvement market, according to the JCHS? Ongoing growth in retail sales of home improvement products and gains in housing prices equating to boosts in home equity. In other words: more homeowners will be empowered and inclined to make improvements.

A Portrait of the Homeowner in 2016

Understanding what lies ahead for the home improvement industry in 2016 begs the question: Who are the homeowners who will be making these home improvement-related decisions and purchases?

 

The National Association of REALTORs’ (NAR) 2015 Profile of Home Buyers and Sellers delivers a clear picture of today’s buyers, including the following key points:

 

  1. First time buyers represented 32 percent of all home buyers.
  2. The average buyer was 44 with a median household income of just over $86,000.
  3. Married couples accounted for the largest number of buyers (67 percent), followed by single females (15 percent), single males (9 percent), and unmarried couples (7 percent).
  4. 16 percent of home purchases were new homes compared to 84 percent for previously owned homes.
  5. 84 percent of homebuyers cited environmental features related to heating and cooling costs as “at least somewhat important.”

 

report from Forbes earlier this year, meanwhile, highlighted the country’s changing demographic composition as an indication of an imminent pickup in housing sales. The case? That while the Baby Boomers have long ruled over the housing market, their complacency in the pre- and post-retirement years led to stagnant demand for housing which is now being reversed by the long-awaited entry of Millennials into the market.

 

An additional thing to keep in mind? According to a report from CBS Money Watch, while most recent figures show Baby Boomers driving home improvement spending at a whopping 47.8 percent share and Millennials bringing up the bottom at a paltry 2.6 percent, an uptick in homebuying by Millennials is expected to produce an uptick in home improvements. (Where are pre-Baby Boomers and Gen Xers in all of this? Somewhere in the middle, respectively claiming 15.3 percent and 34.3 percent of home improvement spending.)

 

Giving Millennials Their Due

With the massive generation of Millennials overtaking the Baby Boomers in number, the country’s shifting demographics can be expected to be seen across numerous spheres, including housing. Factor in that the largest subset of Millennials are in their mid-20s, and their ripeness for settling down doesn’t just bode well for the housing market, but also for home improvement demand. According to the JCHS, this perfect storm-esque coming together of factors will lead to a 3.5 percent average annual growth rate in the home improvement industry in the years ahead.

 

Not only that, but NAR’s report debunks many of the myths associated with Millennial homebuyers, including that they’re home-buying shy. Says Jessica Lautz, NAR’s managing director of survey research, “The allure of homeownership remains strong among [the Millennials] that’s represented the largest generation of buyers for three straight years. Our data show that contrary to some of the stereotypes out there, over 80 percent of buyers in every generation are purchasing single-family homes.”

 

The rise of the Millennial homebuyer is also linked with another recent trend in the housing market, according to CNN: the return of the first-time homebuyer. Heading into 2016, a number of factors are adding to the incentive to purchase, including looser lending standards, more homes to choose from at more affordable prices, and the threat of imminent mortgage hikes. Together, these changes may prompt even more Millennials to pursue homeownership.

 

Still, it’s not all sunshine and roses. A recent Zillow survey of 104 industry experts and market watchers — including economists, real estate professionals, and market strategists — reveals that despite expected increases in housing sales, the percentage of homeowners is predicted to drop between now and 2018. Why? Because while Millennials may be overcoming the obstacles to homeownership, they’re doing it much later than previous generations. In fact, the average age of the Millennial homebuyer was 31 in 2013, and is expected to continue to climb over the next several years. As a consequence of the aging buyer, homeownership rates are actually falling.

 

Fewer Homeowners, More Purchasing Power?

One upside of the later age at which homebuyers are entering into the home ownership picture? They’re less cash-strapped than their predecessors. In fact, according to the Federal Reserve’s Survey of Consumer Finances, which collects data across the spectrum of economic and social groups, the average homeowner’s net worth in the years between 2010 and 2013 was 36 times greater than the average renter’s — or $194,500 compared to $5,400.

 

Not only that, but according to Forbes, the net worth gap chasm will widen to 45 times greater in 2016, based on the projections of National Association of Realtors’ (NAR) Chief Economist Lawrence Yun.

 

What to Expect in 2016

So now that we know the scoop on the home sales and home improvement market; who today’s homebuyers and homeowners are; and that many of them are poised atop significant nest eggs, we get to the $332 billion question: What are they spending those home improvement dollars on? Here are four trends we can expect to see in 2016:

 

1. Eco-Friendly Gets Inspired

Research based on HIRI’s January 2015 Sentiment Tracking Study and a survey of National Association of the Remodeling Industry (NARI) members reveals that today’s homeowners have “very high interest” in energy savings. All told, the average remodeling contractor incorporates 4.7 types of energy savings options into client projects, with the following identified as the top five energy upgrades:

 

  1. adding insulation in walls or attic (71%)
  2. insulating windows (66%)
  3. high efficiency furnaces (59%)
  4. lighting (56%)
  5. A/C units (50%)
  6. Additionally, at least 30 percent of remodelers cited the following energy updates as growth areas:
  7. tankless water heaters
  8. duct insulation
  9. electronic controls that lower energy usage
  10. insulating doors

One point of interest? While energy efficiency may not be a “make it or break it” feature for today’s buyers, many purchase homes with plans to make their own updates after closing.

 

Also worth noting is that the remodeling contractors say they the ones who first initiate discussions about going green. Reports David Merrick, MCR, UDCP, of Merrick Design & Build and chair of the NARI Strategic Planning & Research Committee, “It is very rare for a client to bring up the subject of ways to save on energy. Once we mention the subject and show that what can be saved and the payback on their investment, they are very interested.”

In other words, while homeowners are open to energy savings, the role played by professional remodelers is paramount.

 

2. Outdoor Rooms Are In

Home improvement experts highlight outdoor rooms as a trend which has been steadily gaining momentum in recent years but will take off in 2016. Everything from prefabricated outdoor rooms to backyard patios offer homeowners the perks of an addition free of constraints related to time, work, cost and planning permission.

 

It follows that the market for outdoor furniture is also increasing — and not for the folding chairs and picnic tables of years passed. Upscale outdoor home improvements offering appeal to today’s homebuyers include:

 

  1. hardscaping and pavers
  2. outdoor grill areas with sinks
  3. televisions and sound systems
  4. outdoor fireplaces, chimeneas, smokers
  5. fire pits with seating
  6. tables with chairs and benches

Homeowners are also drawn to the versatility of outdoor rooms, using them for home offices, play rooms, entertainment spaces and more.

 

3. Homes Smarten Up

BI Intelligence predicts that over the next few years the world’s homes will become both smarter and more connected. How much so? Connected-home device shipments will see annual growth rates of 67 percent, reaching 1.8 billion units shipped by 2019 — far outpacing growth of smartphones and tablets.

 

The following connected-home devices, in particular, are likely to be growth areas:

 

  1. smart appliances, including washers, dryers, refrigerators, etc.
  2. safety and security systems, including internet-connected sensors, monitors, cameras, and alarm systems
  3. energy equipment, including smart thermostats and smart lighting

 

What’s driving this market? The desire to make life easier — from enhancing in-home convenience to enjoying greater safety and security.

 

4. Mattresses Have Their Moment

The International Sleep Products Association (ISPA) forecasts consistent growth in the bedding industry for both 2016 and 2017 with the wholesale value of bedding shipments expected to increase 6.5 percent for each consecutive year. The average unit price for mattresses, meanwhile, is expected to rise 2.7% this year, representing the fifth consecutive annual increase in average unit prices. An increase in personal disposable income is largely credited with fueling this growth.

 

The bullishness of the mattress market is consistent with American Lifestyles 2015, market intelligence agency Mintel’s recent report on consumer markets, which forecasts that “nonessentials,” including vacations and dining out, will see growth at rates of roughly 27 percent in the year ahead.

 

Conclusions

The takeaway? While it’s a good time to be in the home improvements business, positioning for success relies on more than surveying the home improvement landscape. The most savvy strategies will acknowledge and encompass an understanding of the housing market at large, the ever-evolving consumer, and how particular home improvement products and services fit into this complex equation.