Expenditures on foreclosures and short sales drove the remodeling market in 2011, as investors spent more to rehabilitate each foreclosure they purchased to flip or rent than either lenders or owners who bought foreclosures to live in. However the rental share of overall spending on improvements has been shrinking since the housing bust.

A new report from the Harvard Joint Center for Housing Studies found that in 2011 lenders made improvements in about one third of the foreclosed properties prior to sale, with an average expenditure of about $6,500 per unit or $1.7 billion. About 60 percent of owner-occupant purchasers undertook improvements averaging $11,100, totaling $4.2 billion, while investors spent even more per unit, an average of$15,600, for a total of $3.9 billion.

In total, spending on distressed properties added almost $10 billion to home improvement expenditures for the more than a million distressed properties that came back onto the housing market in 2011, including 760,000 lender owned units and 300,000 short sales.

Renovating foreclosed or abandoned homes benefits the entire neighborhood. Joint Center research has shown that home prices in neighborhoods with higher levels of improvement spending appreciate more rapidly, explaining why investing in blighted neighborhoods has been a national priority in dealing with the foreclosure crisis, the report said.

Some 4.4 million formerly owner-occupied units were shifted to the rental market between 2007 and 2011. Another 4.6 million were vacant in 2011 and may (at least temporarily) become part of the rental stock as demand continues to grow.

Now, however, the quality of the rental stock is declining. Joint Center estimates show that the expanding supply of rental units in recent years seems to have more than offset increased demand, thereby limiting the incentive to raise improvement expenditures. Between 2001 and 2007, average inflation-adjusted spending on owner-occupied units increased by 40 percent while spending on rental units showed a slight decline. Then, during the housing bust from 2007 to 2011, spending on owner-occupied units fell more than 25 percent and spending on rental units nearly matched that drop.

The rental share of overall improvement and repair spending has therefore been shrinking. After averaging close to 25 percent of the market through the early part of the last decade, the rental share dipped to 16 percent at the peak of the housing boom and has only edged back up near 20 percent since then.