ReNews -- Remodelors Council News - 02/13/2006 (Plain Text Version)

Vince Butler CAPS, CGR, GMB
Remodelors^TM Council Chair
Clifton, Virginia

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In this issue:
EPA Puts Sweeping Lead Paint Regulation in Federal Registry
Remodeling Growth Will Cool in 2006
Baby Boomers Won't Bust Remodeling Market
Vince Butler to Lead Remodelors Council in 2006
Council Launches New Consumer Ad
Show Others Your Professionalism
Ed McGowan, Council Leader, Dies at 69
Remodelors Council in Wall Street Journal and More!
Committee Highlights from 2006 Remodelors Council Winter Board

Remodeling Growth Will Cool in 2006

Growth in the volume of remodeling jobs by the nation’s home owners will be simmering down this year in tandem with a small decline in home building and sales activity, Kermit Baker, a director of the Remodeling Futures Program at the Harvard Joint Center for Housing Studies, said earlier this month at the International Builders’ Show in Orlando, Fla.

Harvard’s Remodeling Market Indicator showed that home owners spent $149.5 billion on residential improvements last year, a 4.3% increase over 2004, Baker reported. During the first quarter of 2005, growth was 20.4% ahead of the same period of 2004, he said, before moving sharply downward to a range of 4.3%-4.4% in the second half.

In his projections for remodeling activity, Baker said he expected to see “a trajectory of easing moving forward” as consumers rein in their optimism about the housing industry to some degree because of rising mortgage interest rates and a slower pace of home price appreciation. However, remodeling should fare better this year than overall housing activity, which is expected to decline by 4%-5%, he said.

Tracking remodeling contractors who are not in the specialty trades and who do have employees, Baker cited payroll statistics gathered by the Department of Labor showing annual payroll growth moving down into an estimated 2.5%-3% range in the fourth quarter of 2005, down from job growth exceeding 5% in the first half of the year.

In third-quarter 2005 findings from the Home Design Survey of the American Institute of Architects, where Baker is the chief economist, the 600 architects who were asked to evaluate the remodeling market identified additions and alterations; kitchen and baths; and townhouses and condominiums as the healthiest parts of the home remodeling market. Demand from first-time buyers and in affordable housing registered the lowest on the list, with a negative response.

Total remodeling volume, including maintenance, amounted to an estimated $275 billion in 2005, he indicated, with $220 billion spent on owner-occupied units, and the balance of $35 billion going for rental units. This represents almost a doubling of remodeling activity over the past decade, and shows that remodeling activity is responsible for about a 40% share of the entire U.S. residential market.

While Baker cited research showing that there is little danger of consolidation squeezing out smaller remodelers anytime in the foreseeable future, an issue that is of greater concern to medium-sized home builders, larger firms in the current slowdown are in a good position to exceed the average growth rates for the industry overall.

Larger Companies Will Grow Faster

“The remodeling market remains fragmented,” Baker said, with the top 500 contractors accounting for 3.9% of the market in 2003. However, according to Census Bureau statistics, the largest 3.2% of the nation’s remodeling general contractors with payrolls, with annual billings of $2.5 million or more, accounted for 32.7% of total firm billings in 2002.

In 2004, according to Qualified Remodeler magazine, 47% of the country’s top 100 remodeling firms engaged in specialty jobs; 12% were design/build contractors; and 21% engaged in other operations such as restoration or insurance repair. Only 20% of these firms were full-service remodelers, Baker said, an indication that these companies typically focus their business in an effort to remain more competitive and efficient.

From 1999-2004, according to Joint Center analysis of Qualified Remodeler surveys, the top 10 remodelers out of the top 100 registered median annual growth rates in revenue of 7.7%, compared to 2.2% for the middle 41-50 companies and 1.3% for the 91-100 biggest.

The analysis also found that median annual growth of the top 10 firms was highest over the five-year period for the full-service companies, with 10.9% growth; followed by 7.6% for those classified as specialty remodelers, 5.1% for design/build and 6.6% for other work.

Because large firms are able to sub out more work and achieve significant efficiencies, they are able to attain far higher levels of worker productivity — measured as net revenue per employee — than smaller remodelers, Baker reported.

With some 35 million homes sold over the past five years and home owners holding $10 trillion in equity on properties worth $17 trillion, Gopal Ahluwalia, NAHB’s staff vice president for research, said he expected the remodeling market to remain healthy over the long-run, growing 2%-3% annually on average, adjusted for inflation, through 2013.

Ahluwalia was not too concerned about the upward drift in interest rates, pointing out that 50% of remodeling activity isn't usually significantly affected by the rates. "When you have a leak in the roof, you can't wait for interest rates to come down or the economy to improve."