Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping the Home Renovation Market
Transcript
- Lucas: Luna, I just got back from a weekend at my brother's place in Phoenix, and he spent the whole time complaining about his contractor. A simple bathroom remodel — not a full gut job, just replacing the vanity, retiling the shower — and the quote came in at eighteen thousand dollars. Eighteen thousand for a bathroom you can still see the toilet in. Luna: That's insane. But I'm not surprised. I redid my kitchen backsplash last year and the tile guy told me his material costs had doubled since 2020. And that was before the latest inflation numbers. Lucas: Right. And now we've got the May core PCE reading — the Fed's preferred gauge — hitting three point four percent, the highest since October 2023. That's not runaway seventies-level stagflation, but it's persistent enough that people are changing behavior. Especially when it comes to their biggest asset: the house. Luna: So the stagflationary squeeze — high inflation, slow-ish growth, elevated interest rates — is hitting the home renovation market in a really specific way. What are you seeing? Lucas: Two big trends. First, the total dollars spent on renovation is actually holding up, but the mix is shifting hard. People aren't doing the big, aspirational projects — the kitchen extensions, the master suite additions, the 'let's knock down a wall' stuff. Those are down maybe fifteen to twenty percent year-over-year. Instead, homeowners are pouring money into maintenance, repairs, and energy-efficiency upgrades. Luna: So less 'dream home,' more 'keep the roof from leaking.' I've noticed that on my block — three houses in a row got new windows last month. All with the Energy Star stickers. Lucas: Exactly. And it makes sense when you look at energy costs. Even though gasoline has cooled a bit, electricity and natural gas are still elevated. A heat pump installation can run you seven to ten thousand dollars, but it pays back in three years if you're replacing an old furnace. That's the kind of math that works even when inflation is sticky. Luna: And the interest rate environment certainly isn't encouraging people to trade up. The thirty-year mortgage is still hovering around seven percent. If you locked in a three percent rate in 2021, you're not moving. You're renovating. Lucas: That's the lock-in effect. And it's deepening. The inventory of existing homes for sale is still tight — we're well below pre-pandemic levels. So people who would normally sell and buy something bigger are instead saying, 'Okay, we'll add that home office ourselves.' The National Association of Home Builders did a survey recently — sixty-two percent of homeowners planning a renovation said they were doing it because they decided not to sell. Luna: But here's where it gets interesting: the cost of that renovation itself is inflating. Lumber prices have come down from their 2021 peak, but they're still above the 2015-2019 average. Copper piping is up, drywall is up, and labor — well, good luck finding a crew that isn't booked out three months. Lucas: And that's feeding into a second trend: the rise of the serious DIYer. People who would have hired a contractor are now watching YouTube tutorials and renting a tile saw from Home Depot. According to the Joint Center for Housing Studies at Harvard, spending on building materials at home improvement stores — the stuff people buy when they're doing it themselves — is up twelve percent year-over-year through April. That's outpacing the overall renovation spending growth. Luna: I feel like I'm seeing that in my own friend group. Two of my buddies just finished building a deck themselves over three weekends. They said the lumber cost them twenty-eight hundred bucks. The quotes they got from contractors were all over six thousand. Lucas: Which is exactly the kind of margin that makes DIY attractive when real wages are barely keeping up with inflation. Average hourly earnings are up about three percent year-over-year — that's roughly in line with headline inflation, but it's lagging core inflation. So households feel the pinch, and saving three thousand dollars on a deck feels meaningful. Luna: And yet, ironically, the people who are spending big — the top quintile of earners — are still spending. They're not DIYing. They're doing the high-end kitchen renovation with the Italian marble and the La Cornue range. That market seems almost recession-proof. Lucas: That's a classic K-shaped recovery pattern, and it's playing out in renovation too. The high-end market is booming. But the middle — the people who would have spent twenty-five to fifty thousand on a mid-tier kitchen redo — they're the ones pulling back. They're the ones putting in a new sink and painting the cabinets instead. Luna: So what does that mean for the industry itself? I'm thinking of the big players — the Home Depots, the Lowe's, the flooring distributors, the cabinet makers. Lucas: The data we have from early 2026 shows that home improvement retailers are seeing a divergence. The big-box stores are reporting solid foot traffic, but average ticket size is down. People are buying more individual items — a single faucet, a bag of concrete — rather than the full-kitchen package. Meanwhile, the specialty showrooms, the high-end tile places, they're reporting flat to slightly up revenue, but with fewer customers spending more per visit. Luna: Honestly, if today's conversation helped you think more clearly about where your own home renovation dollars might go — or if you just enjoy walking through the economy with us — that's worth something. If it was worth a coffee to you, you know where to find it: buy me a coffee dot com slash fexingo. No pressure, just a way to keep this thing ad-free and independent. Lucas: Yeah, we don't run ads, so listener support is really what keeps the lights on. And it genuinely helps us keep digging into these specific angles. Luna: Okay, back to the numbers. Lucas, one more thing I want to dig into: the regional split. I've seen data suggesting that renovation spending per project is actually lower in the Sun Belt than in the Northeast or Midwest. Is that holding true? Lucas: It is, and it's partly a function of housing stock. The Sun Belt has a lot of newer construction — homes built in the last twenty years. They don't need the same kind of major systems replacement. An HVAC system in a 2005 home might have a few more years left. In the Northeast, you've got a lot of pre-war housing stock where the boiler is from 1982 and the windows are single-pane. So when those people renovate, they're spending bigger — often fifteen to twenty percent more per project. Luna: That makes sense. And it also means that in the Sun Belt, the renovation market is more about cosmetic upgrades — new countertops, landscaping, painting — whereas in the Northeast and Midwest, it's more about structural and mechanical. Lucas: Right. And that structural work is harder to DIY. You're not going to replace your own furnace unless you're a licensed HVAC tech. So that supports higher contractor spending in those regions. The Harvard data shows that in the Northeast, contractor spending as a share of total renovation is about seventy-five percent. In the South, it's closer to sixty percent. Luna: So the stagflation dynamic is actually accelerating a pre-existing regional divergence. The Sun Belt's renovation market is becoming more diy heavy and more cosmetic. The Northeast's is becoming more expensive and more contractor-dependent. Lucas: Exactly. And that has implications for everything from building materials demand to labor markets. If you're a plumber in Boston, you're probably booked solid. If you're a painter in Phoenix, you might have to compete with a guy on Nextdoor who charges half your rate. Luna: What about the financing side? People are using home equity loans and HELOCs to fund these projects. But with rates where they are, is that still attractive? Lucas: Home equity lines are still popular because the rates, while higher than they were, are still lower than credit cards or personal loans. The average HELOC rate right now is around eight and a half percent. That's not cheap, but if you're adding value to the house, it can make sense. The bigger story is that cash-out refinancing has basically dried up because nobody wants to give up their low-rate first mortgage. So HELOCs are the main game for people who don't have cash on hand. Luna: And that ties back to the lock-in effect. People aren't selling, so they're not unlocking that equity through a sale. They're borrowing against it instead. Lucas: Right. And that creates a kind of feedback loop. The more people renovate instead of move, the more the existing housing stock gets improved, which keeps prices elevated, which makes it even harder for first-time buyers to enter the market. It's a strange equilibrium. Luna: So where does this go from here? If inflation stays sticky and rates stay high, do we see a continued bifurcation — high-end luxury and low-end DIY, with the middle squeezed? Lucas: I think that's the most likely scenario through the end of 2026. The wildcard is the job market. We saw jobless claims drop to two hundred fifteen thousand last week, which is still very low by historical standards. And job openings actually ticked up in April — JOLTS came in at seven point six million, up from about six point nine the month before. As long as people are employed, they'll find a way to fix the leaky roof. If layoffs start picking up, that's when the renovation market could really buckle. Luna: So the renovation market is a kind of canary in the coal mine for the broader consumer economy. If people stop fixing their houses, you know they're really hurting. Lucas: Exactly. Right now, the canary is still singing — but it's a slightly more anxious song than it was two years ago. The projects are smaller, the budgets are tighter, and more people are doing the work themselves. But the overall spending is still there. It's just being channeled differently. Luna: Alright, next week we should look at what's happening in the rental market. I've been hearing about landlords doing fewer upgrades too. Lucas: That's a great idea. Let's put that on the list.