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Sweet Home Improvement Market
Subject Comparative statics
Topic Equilibrium
Key Words Sales, growth, stock market, financial return, Nasdaq 100, Standard and Poor's 500, federal house price index, income tax refunds, refinancing, interest rates, market conditions
News Story

Home improvement is booming. Home Depot's sales have increased 17 percent over a year ago, while sales at Lowe's are 23 percent higher.

The key factor has been the unheralded number of homes changing hands - 5.3 million in 2001, and probably even more in 2002. A Harvard University study has found that recent homebuyers spend about twice as much on home improvements as homeowners who have been in their houses for a while. Also, move-up buyers spend $3,900 annually, while first-time buyers spend $2,900. Overall, Americans spend approximately $200 billion a year on improvements and maintenance. Popular improvements are remodeled kitchens and bathrooms and finished basements.

The growth in new homes also means that there are more homes that need to be maintained and improved. The warm winter allowed projects to get started earlier. In addition, the events of September 11, 2001 caused some to place greater value on family and home.

With the stock market in the doldrums, the financial return on home improvement can be greater. In the 21 months after March 2001, the Nasdaq 100 declined 64 percent and the Standard and Poor's 500 index decreased 23 percent, while the federal house price index rose 14 percent. People also had money to spend from income tax refunds, sales of homes, and refinancing at interest rates just below 7 percent.

Retailers are exploiting the favorable market conditions by opening up more stores. Lowe's is opening another 123 U.S. stores this year, while Home Depot plans to add 200 stores a year for the next three years. Home Depot is also trying to learn from Wal-Mart's systems and logistics to improve its performance.

(Updated June 15, 2002)

Questions
1.

Draw a supply and demand diagram of the market for home improvement. Show the effect of the following factors on the curves and the equilibrium price and quantity, and explain which determinant of demand or supply has changed:
a) the increased number of homes
b) cheaper interest rates
c) the declining stock market
d) increasing home-centeredness
e) tax refunds
f) more stores
g) better store systems

2. Using the economics of demand, explain why first-time buyers spend less than move-up buyers on home improvements, and why recent homebuyers spend more than those who have been settled for a while
Source Thomas A. Fogarty and Lorrie Grant, "Home improvement raises roof on growth," USA Today, May 22, 2002.

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