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As Mortgage Rates Rise, American Families Look to Remodeling

November 21, 1994

WASHINGTON (AP) _ American families wanting new kitchens or needing roof repairs are taking up some of the slack in the housing industry created by rising mortgage rates.

The National Association of Home Builders estimates homeowners will spend $116 billion on remodeling projects this year, up from $108 billion in 1993. And it predicts spending will climb to $122 billion in 1995.

In fact, the association forecasts spending on residential remodeling will total $175 billion by the year 2000 and surpass the amount spent on new home construction.

To some extent, robust remodeling has offset the effect of higher mortgage rates, which have dampened consumer demand for new housing and caused builders to cut back on construction.

Rates, which had dropped to less than 7 percent in October 1993, stood at a three-year high of 9.19 percent last week. An increase from 7 percent to 9 percent would add $209 to the monthly payment on a $150,000 mortgage.

The home builders association believes new home sales will drop from 669,000 this year to 647,000 in 1995 and 600,000 in 1996.

Some economists, such as Bruce Steinberg of Merrill Lynch & Co., believe that higher rates tend to stimulate remodeling as an alternative to buying another home.

But Gopar Ahluwalia, a Home Builders economist, said higher rates can curb remodeling projects just as they trim home sales.

Many renovations are discretionary, such as adding a garage or finishing a basement recreation room, Ahluwalia explained, and can be postponed if money is unavailable or too expensive.

Still, nearly half of remodeling projects involve maintenance and repair and often cannot be delayed, he added.

The builders group estimates that there are 100 million U.S. homes with a median age of 27 years. That often means leaky roofs, which must be fixed, or worn-out furnaces, which must be replaced.

A total of $42 billion of the $108 billion spent on remodeling in 1993 was for maintenance and repair projects, Ahluwalia said. Additions and alterations accounted for $37 billion; major replacements such as windows, $21 billion, and outside improvements including decks and fences, $8 billion.

In addition, demographics will require some expansion and renovation that otherwise would be deferred.

″We are seeing more people remodeling because they need to, because their family has expanded and they need to add an extra room or finish off the attic,″ said James Quinly of Country Club Remodelers in Kansas City, Mo.

Still, the kitchen remains the top remodeling job, followed by new master bedroom-bathroom suites and room additions.

″The kitchen is the new family room,″ according to Margaret McMahon of Better Homes and Gardens magazine, which conducted a recent remodeling study with the home builders association.

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