Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Driving a Boom in Home Renovation Loans
Transcript
- Lucas: If you've walked through the economy with us over the past year, one thing you've probably noticed is that the housing market is basically frozen. Luna: Yeah, existing home sales have been stuck at levels we haven't seen since the early nineties. Mortgage rates over seven percent will do that. Lucas: Exactly. But here's the thing — people still need to live somewhere. And instead of moving, a record number of homeowners are choosing to renovate. Home improvement loan originations jumped 23 percent year-over-year in the first quarter of 2026, according to the latest Federal Reserve survey of senior loan officers. Luna: That's a big number. And it's not just small projects — the average renovation project now runs about forty-two thousand dollars. Lucas: If walking through the economy with us has made something click, a couple of dollars a month is genuinely what keeps these conversations going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Keeps the show ad-free and lets us dig into these trends without any commercial breaks. Lucas: So back to that forty-two-thousand-dollar figure. It's partly because material costs are still elevated — lumber prices are up about 15 percent from a year ago — but also because contractors are charging more for labor. Luna: And that's the stagflation piece, right? You've got high inflation in construction inputs and slow growth in the broader economy, which means people are spending more but not necessarily getting more for their money. Lucas: Precisely. The Fed's preferred inflation gauge, core PCE, came in at an annual rate of 3.3 percent in April. That's still well above the two percent target. And energy costs are adding pressure — the average household is paying about four hundred fifty dollars more on gas and energy thanks to the Iran situation. Luna: So homeowners are sitting on record home equity — the total is north of thirty-two trillion dollars — and they're tapping it through HELOCs and cash-out refis. HELOC volumes are at their highest since 2008. Lucas: But here's the critical question: is this a durable shift or a temporary response to a frozen market? If the economy tips into recession — and real GDP growth is only at 1.6 percent annualised — people might think twice about taking on more debt. Luna: Especially since the unemployment rate is still at 4.3 percent and job openings are declining. The JOLTS data showed openings fell to about 6.9 million in March, down from 6.9 million the month before. Lucas: Right, the labor market is decent but cooling. Fed's Kashkari said this week that the inflation fight takes priority because the labor market is 'in decent shape.' So rates are staying higher for longer. Luna: Which keeps mortgage rates elevated and the housing market frozen. So the renovation boom might actually have legs, at least as long as people feel secure in their jobs. Lucas: Let's look at who's driving this. It's not first-time buyers — they're priced out. It's existing homeowners, many of whom locked in sub-3 percent mortgages during the pandemic. Their monthly payment would double if they moved, so they're renovating instead. Luna: That makes economic sense. But the projects themselves are getting more expensive. The National Association of Home Builders says remodeling costs rose 8 percent in 2025 and are on track for another 6 percent this year. Lucas: And those cost increases are inflationary in their own right. When you spend forty-two thousand on a kitchen remodel that might have cost thirty-five thousand three years ago, that's contributing to services inflation — the Fed's biggest headache right now. Luna: So it's almost like a feedback loop: high inflation leads to high renovation costs, which feeds back into inflation. But at the same time, the economy is growing slowly, so it fits the stagflation playbook. Lucas: Exactly. And the banks are willing lenders. The Fed's survey showed that banks eased standards on home equity lines of credit in the first quarter, after tightening for most of last year. They see the equity cushion and the low default risk. Luna: But what about the consumer who's stretching? HELOC delinquencies are still low, but they ticked up slightly in Q1. If the economy softens, that could become a problem. Lucas: It's worth watching. The overall household debt picture is actually fairly healthy — debt service ratios are near historic lows because so many homeowners have fixed-rate mortgages at low rates. But new HELOC borrowers are taking on variable-rate debt. Luna: And if rates stay high or go higher, those payments could climb. The Fed's Goolsbee noted this week that energy inflation has been more persistent than expected, so there's upside risk to rates. Lucas: So the renovation boom is a rational response to a dysfunctional housing market, but it's not without risks. The key variable is the labor market. If jobless claims keep trending up — they rose to 215,000 last week from 210,000 — consumer confidence could crack. Luna: And then people might stop renovating, which would hit construction employment and small contractors hard. The remodeling industry employs a lot of small businesses. Lucas: For now, though, the data says people are spending. Home improvement retailer stocks have been outperforming the broader market — the S&P 500 is up 1.4 percent over the past five days, but home improvement names are up more. Luna: There's also a regional dimension. In places where home prices are still rising — like the Sun Belt — renovation makes more financial sense because it adds to resale value. In slower markets, it's more about necessity. Lucas: Good point. And that ties back to the broader stagflation narrative: inflation is uneven, growth is uneven, and consumer behavior is adapting in real time. The renovation boom is one of those adaptations. Luna: It makes you wonder: if the Fed eventually cuts rates, will the housing market thaw and kill the renovation trend? Or will people have gotten so used to their low-rate mortgages that they stay put regardless? Lucas: That's the million-dollar question. My guess is that even if rates come down, the memory of this period will linger. People have been traumatised by the volatility — they might not want to trade a known low payment for an unknown one. Luna: So the renovation boom could outlast the stagflation itself. That's a interesting thought to leave on. Lucas: Yeah. The economy is forcing people to get creative. Renovating instead of moving is just one example of that creativity. We'll keep watching the data.