Cash-Out Refis with Holy-Moly Mortgage Rates for Remodeling

Amid shortages, exploding prices, and long lead times, there are now the new realities of a turning housing market.

By Wolf Richter for WOLF STREET.

Shortages of all kinds, exploding prices, and long lead times have waylaid the construction industry since late 2020 and have grown into a crescendo of disruptions in 2021 and in 2022. We’ve been reporting on it, and homebuilders have been complaining about it in their earnings calls, and commercial property developers have been screaming about it and practically wishing for a recession to end the shortages, price spikes, and delays. It has been a mess.

Professional home remodelers.

And there is another aspect to this: Professional home remodelers, and how they’ve have had to adapt to the pricing chaos and shortages – and what risks they might run into under these conditions, as the housing market has begun to turn amid spiking mortgage rates.

In a survey of professional home remodelers – not DIYers – independent research firm John Burns Real Estate Consulting found that they confront the worst shortages and longest lead times with appliances, windows, and cabinets: 64% of the surveyed professional homebuilders said that it takes over 16 weeks to get appliances. Another 12% said it takes 12-16 weeks to get appliances (in total, 74% said it takes 12+ weeks to get appliances):

Home remodelers said lead times for: 12-16 weeks Over 16 weeks Total over 12 weeks
Appliances 12% 64% 76%
Windows 31% 39% 70%
Cabinets 33% 38% 71%
Doors 28% 23% 51%
Plumbing 21% 11% 32%

 

How they adapt to “the wild housing market conditions.”

John Burns asked the professional home remodelers how they are adapting to “the wild housing market conditions,” and then highlighted the top seven most common responses.

  1. Remodelers are raising prices in response to rapid material price inflation, a dire labor shortage, and extremely long backlogs of demand.
  2. Faced with unprecedented product lead times and unpredictable delays, remodelers are ordering materials earlier, long before work begins.
  3. Remodelers are becoming logistics and supply chain experts, as large projects require extremely close coordination with vendors, subcontractors, and clients.
  4. Remodelers are pushing project start dates out later, while they wait for products and materials to arrive on-site.
  5. As remodelers navigate unexpected delays, many are now filling in scheduling gaps with smaller projects to keep cash flowing.
  6. We see worrying signs that remodelers are stocking up on materials when prices could be peaking and demand could be slowing, setting the stage for potential deflation in building material prices.
  7. Remodelers are putting homeowners on the hook for unexpected price increases by shortening quote windows, adding strict escalation clauses, and rebidding materials before signing agreements.

In light of the turning housing market, the #6 item is particularly interesting: that professional remodelers are stockpiling materials to deal with the shortages and eternal lead times just when prices of those materials “could be peaking and demand could be slowing.”

Three major risks for pro home remodelers.

Given these strategies to deal with shortages and exploding prices as the housing market is turning, John Burns identified three major risks for pro home remodelers as they head into the second half of 2022.

Customer sticker shock and push-back: “Customers are seeing massive price increases from remodelers, and they are starting to push back. Watch for more projects hitting ‘pause.’”

Vanishing backlogs: “Some remodelers are now taking deposits for 2023 projects. However, if home values soften or decline, some of this future demand could vanish.”

Spiking mortgage rates: “In the short term, rate spikes threaten homeowners’ ability to tap record-high home equity and write large 5- and 6-figure remodeling checks.”

Cash-out refis at holy-moly mortgage rates to pay for remodeling projects?  

I call them “holy-moly” mortgage rates because that’s the sound people are making when they try to buy a home at current prices and figure the mortgage payment at current mortgage rates.

These holy-moly mortgage rates have caused mortgage refi’s in general to collapse – entailing large-scale lay-offs in the mortgage industry because a big part of their business has vanished. Applications for refi mortgages, according to the Mortgage Bankers Association, have collapsed by 76% from a year ago and hit the lowest level since the year 2000 (data via Investing.com):

And these holy-moly mortgage rates have also caused applications for cash-out refi’s to plunge by 53%, from a year earlier, according to the AEI Housing Market Indicators for June, because who’d want to refi a 3% mortgage with a 5% mortgage or a 6% mortgage to draw $200,000 out in home equity?

If an existing 30-year mortgage with a balance of $500,000 at 3% is refinanced with a $700,000 cash-out refi mortgage at 6%, the payment is going to nearly double from $2,108 a month to $4,197 a month. And for most people, a doubling of the mortgage payment would be a no-go zone.

So if homeowners have to do a cash-out refi to pay for their remodel project, that remodel project is in serious trouble.

If homeowners can pay for it by drawing on their much-diminished brokerage account balances, maybe OK. Or maybe they’ll take out a margin loan, relying on the next perma-rally, or whatever, so that they might get margin calls in the middle of their remodeling project, which would be an additional marital stress test to overcome.

But if homeowners have the cash sitting around, earning 1% to 3%, or nothing, they might plow it with good conscience into the remodeling project.

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