Introducing Fastmarkets’ new Repair & Remodeling Index
Providing much-needed visibility into the repair and remodeling (R&R) market for wood products buyers, sellers and traders
Fastmarkets is excited to launch its new Repair & Remodeling (R&R) Index that will provide critical and timely insight into wood demand from a massive but often opaque segment of the market.
“The traditional measures for R&R activity in the United States aren’t suitable for today’s dynamic and volatile marketplace,” Tom Jennemann, Fastmarkets Strategy Director, said about the new index that will officially launch in April.
The good data out there is far too backward-looking to be useful, while because it’s reported in nominal dollars there’s a major disconnect between R&R spending and real-world wood consumption, especially in today’s inflationary environment.
Fastmarkets estimates that in 2022 R&R activity in the US accounted for 27% of domestic structural panel demand, 33% of domestic nonstructural panel demand and 41% of domestic lumber demand. For those in the industry who are aware of this, one source of frustration can be the lack of timely, reliable data on R&R activity.
Also complicating the picture is that most measures of R&R activity track sales in dollars. As a result, tracking underlying volumes of materials used in R&R has been almost impossible recently given historically elevated building material price inflation since 2021. These circumstances ultimately motivated us to create a new monthly metric for tracking R&R activity in the US.
A monthly index that measures volume
The upcoming Fastmarkets Repair and Remodeling Index measures volume of activity rather than spending, so comparisons over time are more easily translatable into lumber and panel demand, which we also traditionally think about on a volume basis (i.e. as board feet or square feet). The other primary feature of our index is that it will be reported monthly.
To construct the index, we have utilized two of the most useful pieces of publicly available monthly data: building materials retail sales data found in the Monthly Retail Trade Survey from the US Census and aggregate weekly hours worked by residential remodelers, as reported by the Bureau of Labor Statistics (BLS). This served as the starting point of our analysis, but both face notable limitations as proxies for R&R activity.
Building material sales figures are in nominal dollars rather than inflation-adjusted (real) dollars. Thus, the dollar sales figures alone would be misleading, especially with 2021’s inflationary boom in building materials prices. These reported sales also include spending in the larger new construction segment on top of R&R, making for a less pure read of renovation activity. However, making some basic assumptions adjusting sales for inflation, we have constructed a “real” retail sales indicator that provides a reasonable proxy for volume of building materials sold in a given month.
“Remodeler hours worked” makes for a second useful gauge of R&R construction put in place in the professional contractor segment of the market. The obvious limitation here is that it only represents the “pro” side of the R&R market and largely misses do-it-yourself (DIY) activity.
The Harvard Joint Center for Housing Studies (JCHS) estimates that the DIY share of repair and remodeling spending in 2019 was 17.4%. However, parsing out the labor costs and contractor margins baked into the pro-R&R spending (and presumably not in DIY reported spending), the DIY share of just building materials spending would likely be somewhere between 20-30%. This is a sizable segment of building material demand that also must be captured. Observing contractor hours alone would have entirely missed the DIY boom that transpired at the outset of the pandemic.
Using Google trends to capture the DIY section of the market
With two solid indicators to work from, the final piece of the puzzle in the creation of our new index was capturing this DIY portion of the market. For this, we turned to Google Trends, which provides data on search volumes going back to 2004. In the midst of the pandemic-induced wood-products boom, we found ourselves looking for alternative measures of DIY activity that were timely and directionally reliable to track this segment.
We began monitoring key Google searches related to DIY to help understand what was happening. While search trends are no guarantee of foot traffic or sales transactions, they do clearly measure the volume of public interest on a subject, and a growing body of evidence suggests this can often be a precursor to actual economic activity. We soon formalized this process by collecting a proprietary set of search terms related to DIY home repair and remodeling and aggregated these together to produce a single DIY indicator. This composes the third and final critical variable in the Fastmarkets R&R Index.
Comparing our Repair and Remodeling Index to others
The final question that many of you are likely asking is how does this index perform relative to other market indicators for R&R? The same facts that led us to create this index also make it hard to find something to benchmark it against on a monthly basis. However, we can at least compare our new index on an annual basis with what is probably the most reputable source of R&R historical data: the Leading Indicator of Remodeling Activity (LIRA) from the JCHS.
The LIRA was originally designed to predict turning points in the R&R sector, and it uses a four-quarter rolling total to smooth out some of the noise in the problematic legacy home improvement spending reported by the US Census Bureau. The JCHS has recently revised the last two full years of its LIRA time series (2020 and 2021) based on the latest biennial benchmark against the American Housing Survey. Interestingly, the revisions were substantial and to the upside, even prompting the JCHS to explain in a special note to those following the index closely. Most encouraging to us at Fastmarkets? The upwardly revised growth in 2020 and 2021 landed extremely close to the implied volume growth suggested by our Fastmarkets R&R Index.
The puzzle of what is happening with underlying R&R activity has stumped many in the industry since the outset of the pandemic in 2020 and made it very difficult to understand market developments in the wood products industry. No indicator is perfect, and the methodology and inputs for the Fastmarkets R&R Index will likely evolve over time with better data and industry feedback. But we are proud to be launching an index to help provide more clarity to this critically important market.
Our Fastmarkets R&R Index has now launched. Subscribers to the Lumber Commentary, the Structural Panel Commentary and the Particleboard and MDF Commentary will be given full access to the time series starting in April with our normal publication schedule, but the index will be reported in Random Lengths Weekly with more truncated historical data for broader consumption.