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More Small Jobs Needed to Sustain Remodelers in 2007
With the negative impact of the housing downturn beginning to catch up with the remodeling industry around the middle of last year, big spenders on home improvements and additions have been moving to the sidelines, according to two panelists who presented the remodeling outlook at the International Builders’ Show in Orlando earlier this month.
And to keep up their volume, remodelers have had to look for more small jobs among a wider base of customers.
“It’s been a tough year for remodeling, but it could be worse. After all, you could be a home builder,” said Kermit Baker, director of the Remodeling Futures Program at the Harvard University Joint Center for Housing Studies.
The remodeling market has “stalled” recently, Baker said, with an estimated $278 billion in total volume in 2007. As the market has softened, remodeling contractors have been scaling back, reducing their payrolls from 325,000 at mid-2006 to 306,500 in the fourth quarter of 2007.
“The weakness has been greatest at the upper end of the market,” Baker said, which was the segment that had been creating growth earlier in the decade. “But there is evidence of home owner interest in mid-level jobs and a return to basics.” Home owners are now concerned about “over-improving” relative to prices in the neighborhood and making investments that they won’t be able to come close enough to recovering when they sell.
Although the absolute level of cost recovery of remodeling projects varies by the job and where the home is located, nationally it was down to an average of 70% last year compared to 82.5% in 2003, according to cost vs. value reports from Remodeling magazine.
“The outlook is more of the same,” Baker said, with pending existing home sales, the best indicator of remodeling demand, and overall home prices continuing to decline. “Lower prices are leaving home owners with less equity to tap to finance home improvements.”
Freddie Mac reported that cashed-out equity at refinancing, a high share of which is used for home improvement projects, dropped from $320 billion in 2006 to $260 billion in 2007, roughly the same as its level in 2005. “Lenders are now less reluctant to lend that money as underwriting standards tightened in the second half of 2007,” he said.
Through the third quarter of this year, Baker forecast that there would be “no reversal of current softness.” However, the slump for remodelers should be relatively mild, with things beginning to turn around by year’s end.
Smaller contractors are more vulnerable to the declining health of the remodeling industry, he said, and there will be more business failures this year.
With downward pressure on the demand for upper-end projects, Baker advised remodelers to expand the population they traditionally serve. At the same time, there is the risk that smaller companies desperately looking for business could be undercutting the competition.
“You have to know what it takes to maintain profitability for your business,” he said. If you adjust to that and market aggressively “you’re likely to be around next year if there are problems.”
Despite the current cyclical downturn, the longer range outlook for remodeling remains favorable, according to Gopal Ahluwalia, NAHB’s staff vice president for research.
Total residential remodeling expenditures on improvements and maintenance climbed steadily from $49.3 billion in 1983 to $228.2 billion last year, he said, using statistics from the U.S. Census Bureau that include less activity than the calculations from Harvard.
After this year, remodeling volume will begin inching up again, Ahluwalia said, growing to a projected $369.3 billion by 2016. “The share of improvements and maintenance won’t change significantly over the next 10 years,” he added.
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