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A Common Indicator of Residential Improvements is Broken

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• NAHB publishes a remodeling diffusion index on a quarterly basis. The index is measured on a scale of 0 to 100, where an index number of 50 indicates equal numbers of remodelers report activity ‘higher’ and ‘lower’ than the previous quarter. A rising RMI should be strongly correlated with rising remodeling activity and the RMI was on a rising trend over the course of 2014

• If remodeling activity had indeed plunged in 2014 as the C30 number suggests, then employment in the sector would have plunged as well. To the contrary, employment of carpenters rose to a six-year high in 2014.

• Data from Dodge Analytics—the respected construction data firm—actually showed that residential improvements expenditures surged in 2014. This data should be taken with a large grain of salt as it only covers projects in which costs exceeded $100,000 and the survey is skewed towards apartment remodeling firms. But if we assume that expenditures for these large renovations were indeed robust, the spending on small projects would have
needed to plunge for the C30 numbers to even approach reality.

• US housing stock has aged rapidly. According to NAHB, the median owner-occupied home was 37 years old in 2013 compared to 27 in 1993. In a year filled with strong employment and to a lesser extent rising income growth, is it likely that homeowners continued to put off remodeling?

• Apparent consumption of wood products increased in 2014 beyond a level that can be explained by the increases in new residential construction, industrial production and non-residential construction. For example, if residential improvements did indeed plunge by as much as the C30 number indicate, then the usage rate for lumber would have had to increase by about 30%. This is not plausible.

Future FEA Forecasts Will Use a New Indicator for Repair and Remodeling
By now it is abundantly clear that we cannot trust the residential improvements data derived from the Census Bureau’s C30 report. We have looked at many alternatives and all of them are flawed. We looked to private organizations such as Dodge Analytics (only covers very large projects), BuildFax (has a very small sample size) and NAHB (publishes a diffusion index that does not capture changes in magnitude) to provide potential replacements for the C30-derived indicator and found them lacking.

We attempted to find statistically significant relationships between the various sales measures, but found it difficult to ascertain the share of these sales going to the remodeling market. We had hoped to find an estimated equation that tracked the C30 number prior to 2014 but did not plunge in 2014.

The solution was to dig deep into the Supplemental Estimates of the National Income and Product Accounts and into the Underlying Detail Tables.