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Mild Remodeling Slide Follows in Housing’s Footsteps
Following in the footsteps of the current downturn in housing production and sales, the residential remodeling market has entered into a decline that is expected to persist well into next year, according to participants in an NAHB news teleconference on May 8.
The slowdown is expected to be concentrated almost entirely in home owner improvements, and the extent of the decline in the industry won’t be as steep as the ongoing correction in home building, they said.
Americans will spend nearly $233 billion on home remodeling this year, said NAHB Chief Economist David Seiders. While that represents a 1.9% increase from the record $228 billion spent in 2006, it translates into a modest decline of 1.5% once it’s adjusted for inflation.
Remodeling activity in 2008 is expected to grow by 2.8% next year, he said, which would be a decline of 0.5% after inflation.
“Quite simply, we’re adding more homes each year than we’re tearing down,” Seiders said, “and these will eventually require remodeling. Compared to other components of the housing industry, remodeling remains one of the few areas to show growth, at least in nominal terms.”
Along with growth in the nation’s economy, an aging housing stock — with homes in the U.S. averaging 33 years and rising — will be providing some underlying support for upgrades and repair even as remodeling volume weakens.
While the direction of activity in remodeling generally follows home building, with a lag time of three to six months, “home owners cannot put off a major repair like a leaky roof as they can discretionary upgrades, and that stabilizes the industry during slower housing markets,” Seiders said.
Noting “a good bit of sensitivity of larger improvements to owner-occupied housing” during down times, Seiders said that the downturn would be most evident in highly discretionary jobs like remodeling kitchens and baths and adding rooms.
Owner-occupied remodels account for 78% of remodeling activity, and of those, 64% are for improvements, as opposed to maintenance and repairs.
Remodeling Not in Jeopardy
“Remodeling is really not in jeopardy at all, but a lot of the concern we see in the remodeling sector has to do with the fact that new home building is so weak,” said Kermit Baker, director of the Remodeling Futures Program at the Harvard University Joint Center for Housing Studies.
The inventory adjustment process now slowing home building is not a problem for remodeling, Baker said. “You don’t do remodeling projects on spec, so it’s hard for the industry to get too far ahead of itself” and the industry will be able “to work through its weakness a good deal faster.”
Foremost among the positives for remodeling is the strength of the U.S. economy, he said. Most remodeling recessions coincide with a recession in the national economy, but this time the economy is still in a growth mode. “Some of the numbers are weak, below par, but it doesn’t look like we’re going to be entering a recession in the macro-economy this year,” he said.
Home owner equity is also a plus for remodeling, Baker said. Even with house prices leveling off or declining, most households who have owned their homes for a few years “have a good deal of equity in their home and can always tap into it to finance home projects.”
Home owners are continuing to refinance their mortgages, especially adjustable-rate borrowers who are moving into fixed-rate loans to avoid higher monthly payments when the interest rates on their mortgages are increased, he said, and they are typically taking some cash out, a good share of which goes to home improvement spending.
Although growth in home improvement spending has been on the increase for the first half of the decade, not all of the niches in remodeling are “tapped out,” he added.
Rising home energy costs suggest an expanding market for energy-efficient retrofitting, he said, although research suggests that this is a process that could take several years.
But more is being spent on improving rental units and baby boomers are spending on aging-in-place modifications to their homes as they anticipate their needs during retirement, he said.
Nevertheless, “softer housing prices are creating nervousness for home owners and a little concern for undertaking home improvement projects in the midst of a home price correction,” Baker said, and many will be waiting to see prices hit bottom.
Also, the current slump in home sales does hold negative repercussions for remodeling because those sales trigger home improvement activity; the most popular time for making improvements is after a home is purchased.
The Strongest Year Ever for a Chicago Remodeler
Mike Nagel, CGR, CAPS, chairman of NAHB Remodelers and president of Remodel One, reported that “this is the strongest year ever” of his 22 years in the business in the Chicago market. “We have a very strong referral market in Chicago and have a lot of good professional remodelers. There’s plenty of work here.”
Nagel noted a trend toward professional installation, and he said that it is largely being driven by two-income households with “less and less time to spend working on their own home.”
Looking at new business prospects for the industry, Nagel said that green remodeling has not really come into its own and may not be full-blown for a decade. For the time being, consumer demand for green remodeling seems to be limited to products that will save money, such as high-efficiency furnaces and air conditioners, energy-saving appliances and point-of-use hot water heaters.
Still, in general, “people are still equating green with added costs,” he said.
Citing the more than 120 million homes across the country and home owner equity of $11 trillion, “the demand for remodeling will be there now and in the future,” Nagel said. Remodeling currently accounts for more than 40% of the home construction industry by dollar volume.
Economists in the teleconference said that the remodeling industry may well return to another record-breaking year by 2009.
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