One of the widely accepted misconceptions surrounding the so-called "housing recovery" fanfared by misleading headlines such as this "Remodeling activity keeps up positive momentum [13]", which in reality has merely turned out to be a housing bubble in various liquified "flip that house [14]" MSAs (offset by continuing deteriorating conditions in those places where the Fed's trillions in excess reserves have trouble reaching coupled with ongoing foreclosure stuffing), is that "renovation spending", the amount of cash spent to upgrade and update a fixer-upper, has surged. In fact, the guiding light that renovation spending would be a key driver of the housing recovery was sufficient for BofA to release the following last August [15]:
As homeowners take on long-delayed remodeling projects and real estate investors fix up distressed properties, the home improvement sector is getting its own makeover, according to a new BofA Merrill Lynch Global Research report.
“Spending on home improvement is a powerful economic force that will provide a tail wind to the remodeling and construction industry for years to come,” said Denise Chai, retail analyst at BofA Merrill Lynch Global Research and a co-author of the report. “As small-scale renovations give way to bigger ticket home remodeling projects and properties turn over to new owners, a wide range of companies and sectors stand to benefit.”
The analysts identified four sectors for investors to focus on: home improvement, home furnishings, building materials and appliance makers.
“While the home remodeling market is often overlooked, it is helping to lead the broader housing recovery,” said Michelle Meyer, senior U.S. economist at BofA Merrill Lynch Global Research, who provided economic insights as co-author of the report. “There are some near-term macro headwinds, but also strong underlying trends that will sustain spending for years to come, creating a long-term investment cycle.”
The report culminated with the following:
BofA Merrill Lynch Global Research expects this surge in home remodeling activity to be aided by a healing economy, eventually fueling a recovery in household formation and housing turnover.
The last sentence is somewhat ironic, because as Bank of America itself updated first thing today, its proprietary metric of Census Bureau data looking a renovation spending has imploded in the past six months to levels not seen since 2010! So much for the "healing economy" pushing remodeling activity higher? And so much for a recovery in household formation and housing turnover?
[16]
The Hurricane Sandy line, by the way, should be an upside inflection point, as households rushed to fix up their homes damaged in part or in whole in the aftermath of Sandy, not a downward one. The result is so stunning not even BofA can't believe its implication:
We have been quite puzzled with the recent data from the Census Bureau showing that spending on home improvements has declined sharply from November through March. Not only do we think the fundamentals dictate a gain in renovation spending, but some of the more granular data suggest a pickup. We suspect the Census data will ultimately be revised higher, either in upcoming monthly releases or with the comprehensive benchmark GDP revision released in July.
Or just maybe the data is right, and the reality, not BofA's misconception (there's that word again) of it, is that households are in fact quite tapped out when looking at actual, unmanipulated data, which incidentally would foot quite well with the seasonally adjusted winter strength (and unadjusted weakness) which always fades into a period of spring gloom, when the implicit benefits from the most recent liquidity injections once again fade.
Either way, with numerous housing indicator data already topping out and once more facing lower, expect the deterioration in renovation spending to accelerate further in the coming months as the reality of the US household's financial picture can no longer be supressed by various seasonal adjustmenst and distracting S&P500 legerdemain.