- High home prices and mortgage rates have made the housing market especially tough for millennials, leaving many priced out of buying larger or new homes. As a result, a growing number of homeowners are opting to renovate by tapping home equity to stay put. This shift reflects the new reality where renovating for function and value, rather than moving, is becoming the norm among younger generations.
No matter which way you slice it, the housing market is challenging for just about everyone right now. Mortgage rates nearing 7% and elevated home prices have kept buyers out of the market. Sellers have gotten fed up with not getting the offers they think they deserve.
That’s been especially tough for millennials who are growing out of their first homes. In many markets across the U.S., some smaller or starter homes are selling at or near $1 million—which prices the vast majority of younger buyers out.
But instead of dwelling on the fact they can’t afford their dream home, many current home owners are turning to renovations instead to add that idealistic kitchen or extra bathroom they would’ve wanted in a newer, larger home. Results from a June survey by This Old House, a home improvement brand, shows 60% of millennial homeowners and 56% of Gen Z homeowners have remodeling or renovation plans this year.
In the real estate industry, it’s generally agreed upon that renovating a current home can typically be cheaper than building a new home from scratch or buying a larger existing home—although there are always individual factors at play that can impact a homeowner’s decision. But according to renovations marketplace Realm, it’s $49,000 cheaper on average to renovate an existing home and $79,000 cheaper to expand it than to buy a new one. Realm, which was founded in 2019, is responsible for about $200 million worth of projects each year, mostly in California and Seattle.
Why homeowners are staying in place
This staying-in-place phenomenon is caused by four main factors, Liz Young, founder and CEO of Realm, told Fortune. The first is current homeowners don’t want to sell their properties and re-enter a housing market that has mortgage rates much higher than the sub-3% rates of the pandemic era. Second, there is very high home equity in the U.S. Many homeowners tap into this home equity through a home equity line of credit (HELOC) for home renovations. This is also an appealing option because even if the home renovations are expensive, they’re being financed through a HELOC at more manageable monthly payments.
Next is that we have an aging U.S. population who are staying in their homes for longer, and finally, new zoning rules have made it easier for homeowners to add on to their current homes or even build accessory dwelling units (ADUs) for family members or for use as a rental property.
“If you live in an area where the price per square foot to purchase a home is high, you could almost always add space and significantly increase your home value in doing so,” Young said. “There’s just no incentive right now for a consumer to leave their home and disrupt that low [mortgage] rate.”
Home renovation trends
Young said they’re seeing homeowners approach adding space to a home in three ways: adding to their primary residence, building ADUs, and converting unused space to make it functional. This would include additions such as an extra bathroom or bedroom or converting a garage, a shed, or basement for livable space for a family member or a tenant.
Because renovations can be disruptive, Young said homeowners are also prioritizing getting multiple renovation projects done at once.
“If you’ve ever gone through a renovation, the reality is they are disruptive,” Young said. “Because people could tap into home equity to fund these projects, we’re really seeing them do multiple things at the same time.”
Kitchen renovations are one of the most popular choices among homeowners, Young said, as well as larger-scale outdoor projects.
“With the pandemic, people got used to entertaining and hanging out outside. This is just an extension of our living area,” she said. “We’re seeing people look to have a fluid indoor-outdoor living setup where you’re able to transition seamlessly from entertaining or hanging out inside as well as outside.” This could include projects like hardscaping, outdoor kitchens, pools, and poolhouses. Outdoor living rooms are also popular.
The trends in home renovations also ultimately show how the American dream has changed.
“The big thing that we’ve seen change is this idea of buying your dream home out of the gate,” Young said. “If I rewind the clock 15 years ago, people had these big ambitions or dreams of like, ‘Oh, I’m going to buy this amazing house and it’s going to be perfect.’ And for millennials—myself included—that’s just not the reality. There’s not enough housing inventory.”
