ReNews -- Remodelors Council News - 05/28/2008 (Plain Text Version)Lonny Rutherford, CGR, CAPS
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E-mail Our Editor In this issue: Remodeling Outlook Brighter for Some Than OthersThe ongoing housing slowdown is taking a toll on remodeling activity, but some parts of the multi-faceted industry are performing better than others and prospects overall should start to brighten next year, according to participants in a May 7 NAHB teleconference on the remodeling market outlook. Housing has been rapidly declining since the end of 2005 “with no letup,” said NAHB Chief Economist David Seiders, “and patterns of that overall housing market are really important to what the remodeling sector will be doing.” The industry is not countercyclical, Seiders said, even though it is often perceived that way, and “spending generally moves in the same direction as new housing activity, with not as much volatility up and down and with a bit of a lag, but it is definitely affected by a housing cycle like this.” In constant 2000 dollars, total remodeling volume fell about 4% in 2007, he said, and a further 7% decline is expected this year. Improvements are feeling the brunt of the downturn, with the decline in additions and alterations registering a 5% decline last year and headed for an 11% slide in 2007. By comparison, spending on maintenance and repair was off by less than a scant 1% in 2007 and it is actually expected to increase this year, with further growth in 2009 that will help stabilize the overall remodeling market, he said. Improvements to owner-occupied housing, particularly big jobs, are the most cyclically sensitive component of remodeling, he said, “and are just about as cyclical as the new home market itself. There we do see for 2008 about a 13% decline,” followed by “essentially flatness” in 2009. However, “the longer-term trend is excellent. This is an episode.” Rental housing has experienced “a little bit of erosion” on the improvements side, Seiders said, but maintenance spending has shown growth, and the rental side of the remodeling industry has profited from a significant erosion of the U.S. homeownership rate from its all-time highs during the boom. Geography of Remodeling Kermit Baker, senior research fellow and director of the Remodeling Futures Project at Harvard University’s Joint Center for Housing Studies, noted that “in terms of the geography of remodeling, there is a lot of interest for obvious reasons.” Activity tends to be very local “with tremendous variations in broad numbers,” he said. “Some markets are doing very well and some are doing very poorly.” “There is no consistent publicly available data base to talk about remodeling activity at the local level,” Baker said, but statistics for owner-occupied house prices and existing home sales can serve as a fairly reliable “proxy” for home improvement expenditures. A large amount of remodeling comes from sellers preparing to put their homes on the market and from buyers of those homes customizing them after they have been purchased, Baker explained. And when home prices go down, as they have been recently in many markets, home owners have less equity to use to refinance remodeling expenditures. Also, in the current environment there is less incentive for home owners to undertake projects because they will receive a lower return on their investment, and they are waiting for prices to hit bottom. Baker said that the 10 metro areas among the top 50 expected to do the best this year are locations where home sales have declined modestly and house price declines have been lowest through the fourth quarter of 2007. Surprisingly, they are concentrated in the Midwest, he said, where local economies have displayed notable weakness but now appear to be stabilizing. Based on sales declines, remodeling leaders in that region include Columbus, Ohio; Cleveland; Indianapolis; and Milwaukee. Also on the list of metro areas expected to show the most stability in remodeling this year based on sales are Boston; Buffalo, N.Y.; New York City; and Oklahoma City. On the list of relatively strong metro areas judging from how well home prices have been holding up are Seattle, Portland, Ore.; Nashville; Charlotte, N.C.; and Virginia Beach, Va. The oil-based economies of Texas should give remodeling a fairly smooth ride this year in Dallas, Houston and San Antonio, based on price, he said, and Austin, as well as Pittsburgh, score among the top 10 based on both home prices and sales. The markets most vulnerable to a remodeling downturn are concentrated in California and Florida, Baker said. “These are the markets that are very overbuilt from the new construction side, working over into the remodeling side. In the West, the least attractive remodeling markets appear to be San Francisco, Sacramento, San Jose, Los Angeles, Riverside and San Diego, in California; and Las Vegas and Phoenix. Weaker remodeling markets in Florida include Jacksonville, Orlando, Tampa and Miami, he said, and sitting by itself is Detroit, whose economic base has generated severe job losses and made housing prices unsustainable. Remodeling Cost vs. Value Looking at how much home owners can expect to recoup their investments in remodeling projects in today’s market, Baker said that mid-range improvements and replacements generally have a better payback than upscale projects. “The percentage of cost recouped on remodeling projects has been declining in recent years,” he said. With some variation by market and project type, Remodeling magazine and the National Association of Realtors®’ Cost vs. Value studies showed that more than 80% of remodeling project costs was recovered on average in the 2003 to 2005 period, he said. That fell to 70% last year. Replacement projects, such as those for windows and siding, are holding up well in terms of recovery costs, he said, somewhat more so for mid-range over upscale jobs. “These are performing better than discretionary projects that don’t need to be done to retain the structural integrity of the home,” Baker said. Remodeling in Almost Every Neighborhood “Out here in the Southwest, we’re holding our own in remodeling,” said Lonny Rutherford, CGR, CAPS, chairman of NAHB Remodelers and president of Legacy Construction in Farmington, N.M. Outdoor buildings, decks and outdoor living spaces are especially hot items in his area, Rutherford said. And in Santa Fe, onerous development rules are encouraging more builders to turn to remodeling. New Mexico markets are seeing a great deal of additions and kitchen renovations and “everybody is busy,” he said. “Remodeling projects are almost in every neighborhood.” Nevertheless, the financing options for remodeling have started to tighten up, and he cited the case of one “gold-plated” customer who had to visit three different banks before he was able to obtain financing for his project. Nationwide, “some remodelers are feeling the crunch,” Rutherford said. “In talking with other remodelers around the nation, we hear that home owners are taking more time to sign a contract and starting to hold off on making that decision to see what the market is going to do, particularly in the Northeast.” Also, remodelers are noticing much less work in the pipeline compared to the boom times earlier in the decade, when it might have taken them one or two years to be able to start a particular project. For remodeling customers, this is a plus because they can now have projects completed much faster, he said. Overall, “high-end jobs are slowing down,” Rutherford said. “Remodelers are taking on smaller projects and some of these are not in their models because they were geared up to do the bigger jobs.” They are now making adjustments, and that process is “causing a bit of heartburn.” The market, however, is seeing strength, and growth, in calls for green remodeling and aging-in-place retrofits allowing residents to remain in their homes long after retirement, he reported. For more information, e-mail Kelly Mack at NAHB, or call her at 800-368-5242 x8451. For more information or to contact us directly, please visit www.NAHB.org | ©2008, National Association of Home Builders |