Home Remodels Drive Surge in Asset-Backed Bonds: A New Frontier for Investors

The U.S. housing market has long been a cornerstone of the economy, but its latest transformation is reshaping the asset-backed securities (ABS) market. As homeowners increasingly prioritize renovations over moving, a new wave of financing—home improvement (HI) loans—is fueling record issuance of asset-backed bonds. This shift, driven by high home prices, structural market tailwinds, and evolving consumer preferences, is creating opportunities for investors seeking yield in an otherwise challenging fixed-income landscape.

The Renovation Boom and Its Financial Implications

The catalyst for this trend is clear: home prices have soared to record levels while mortgage rates remain elevated, making it financially unwise for many to sell and relocate. Instead, homeowners are opting to upgrade their current homes. This has spurred a surge in home improvement spending, projected to exceed $509 billion in 2025, a 1.2% increase from 2024, according to the Leading Indicator of Remodeling Activity (LIRA).

The financial instrument capitalizing on this trend is the HI loan, which offers quicker underwriting (often completed in days, versus weeks for traditional home equity loans) and promotional low- or no-interest periods. These features have made HI loans the preferred financing choice for projects ranging from kitchen upgrades to energy-efficient retrofits.

Structural Tailwinds Fueling Growth

The ABS market’s expansion is not merely a function of demand. Structural shifts in finance are also at play:
- Bank capital requirements: Post-crisis regulations have incentivized banks to securitize loans off their balance sheets, driving increased issuance of HI ABS.
- Insurance companies’ hunt for yield: With policy and annuity liabilities growing, insurers are turning to ABS for their relatively stable cash flows and higher returns than Treasuries.
- Stable macroeconomic backdrop: A tight labor market (unemployment at 4.1%) and rising real disposable income (up 3.1% year-over-year) bolster consumer creditworthiness.

These factors have propelled total ABS issuance to a projected $345 billion in 2025, a 6% rise from 2024. HI ABS, in particular, has seen meteoric growth, with issuance jumping from $2 billion in 2019 to over $5.8 billion in 2024. Through the first half of 2025, HI ABS issuance already reached $3 billion, accounting for half of cumulative volumes since 2019.

Risks and Challenges on the Horizon

Despite the optimism, risks loom. Tariffs on construction materials—such as softwood lumber (subject to 14.5% tariffs)—could inflate renovation costs, forcing homeowners to seek larger loans or delay projects. Conversely, a prolonged economic slowdown or a sharp rise in unemployment could crimp demand.

Structural risks in HI loans themselves are also worth noting. While delinquency rates remain low (e.g., 0.34% for industrial loans), HI loans carry unique risks, such as delays in project completion or disputes with contractors. KBRA, the credit rating agency, applies its Global Consumer ABS Methodology to HI loans, adjusting for these risks by emphasizing underwriting criteria like installer reliability and borrower credit quality.

The Investment Case for HI ABS

For investors, HI ABS offers a compelling mix of yield and stability. Key advantages include:
1. Diversification benefits: HI ABS typically correlate less with traditional fixed-income assets, offering a hedge against interest rate volatility.
2. Strong cash flows: The average HI loan term of 15–30 years provides steady income streams, while low delinquency rates (historically below 1%) signal credit resilience.
3. Tie to secular trends: An aging housing stock (median age of 44 years) and climate-driven demand for energy efficiency and disaster resilience are structural tailwinds for renovation spending.

The sector’s growth potential is further underscored by KBRA’s projection that U.S. home improvement spending could hit $1 trillion by 2027, driven by smart home technology adoption, climate adaptation, and an aging population seeking to “age in place.”

Conclusion

The home improvement ABS market is no longer a niche investment but a mainstream opportunity for yield-seeking investors. With $509 billion in annual renovation spending and issuance volumes set to surpass $6 billion in 2025, HI ABS is carving out a significant role in the fixed-income landscape.

While risks like tariffs and economic headwinds remain, the fundamentals—strong consumer demand, robust underwriting standards, and structural market tailwinds—make HI ABS a compelling bet. As KBRA notes, this segment’s growth is “not just cyclical but structural,” aligning with long-term trends in housing and finance. For investors, now is the time to consider exposure to this dynamic market.