By Marcia Jedd
The bubble has burst. There seems to be no argument about it. Housing inventories are mounting as prices are falling. Compared with one year ago, median prices of homes are down in all regions of the country. According to recent numbers from the National Association of Realtors, the numbers of existing homes sold are down in double-digit percentages versus one year ago in every U.S. region except for the South, where the decline has been less.
With so much concern about new construction, though, another key element of the building industry sometimes seems to have been overlooked. Just how is the slump affecting remodeling, which is a $1.5 billion market in itself? Remodelers, take heart: In a housing downturn that is exceptional in many aspects, remodeling is holding its own. In fact, by some accounts, business is booming. Here's a wrap-up of today's realities about remodeling, as well as the national and regional markets:
Remodeling is far less cyclical than new home construction and real estate. It's a myth that when home building is strong, remodeling is weak (and vice versa), says Kermit Baker, PhD, director of the Remodeling Futures Program at Harvard's Joint Center for Housing Studies (JCH). He says that, given the nation's aging housing stock, a deteriorating economy—as seen in high gas prices and slowed economic growth—isn't going to stall smaller home-improvement projects such as replacing windows and roofs.
"The upper end has really been driving the remodeling market in the last few years," Baker says. "That will step back a bit with not as many high-end projects as we've seen in recent years." He says homeowners have already pulled out money from their homes through refinancing, so the bulk of high-end kitchens and full-blown additions are completed for now. "When you've less equity, you have less motive to reinvest in your home."
Remodeling spending is slowing. JCH's Remodeling Activity Indicator found homeowners spent about $155 billion on remodeling and home improvement during the four quarters through June 2006, up only 2.8 percent from the prior period. Baker says slower home sales tend to limit opportunities for remodeling, since the time of purchase is the most popular time to remodel. He predicts the worst is over. "We've peaked on the slowdown, but it will still be a slow period as economic growth rates slow down through the end of 2006 and into 2007."
Expect strong demand for home improvements such as windows, roofs, flooring, decks and small additions. As Baker suggests, smaller projects will continue. Paul Vosen, CR, is president of Degenhardt Home Improvement in Madison, Wis. His company focuses on roofing, siding, windows and decks, and his business is up 30 percent this year in a market that's overbuilt with new homes and condos.
"From what I've seen in 30 years in the business in the same geographical market, real estate swings—a seller's market or a buyer's market—have little or no effect on remodeling," Paul says. Perhaps to better position themselves when they do sell, he says, homeowners are selecting higher-end, durable products, such as 30-year warranty shingles and composite decking.
Regional reports: Remodeling demand is strong in many markets.
- Midwest. Consumers are hesitant to list their homes for sale in a soft real estate market, and they also are staying put in older neighborhoods because of high commuting costs. Both factors reduce demand for housing in outlying communities, says John Murphy, president of Murphy Bros. designers and remodelers in Minneapolis, Minn. So they remodel what they have. Empty nesters, for example, want to create that master suite.
"People are saying they want to fix up the house now and sell in a few years," says Murphy. "Too much new-home stock will impact sales of existing homes and keep demand for remodeling fairly high."
This summer, Murphy was among approximately 15 Midwest remodelers who participated in a roundtable forum. Most reported brisk business. "Only a few said they needed more booked work. The larger companies with more marketing presence are in better shape than smaller ones." The Murphy Bros. roster is booked through the first half of 2007.
- Northeast. The varied and aging housing stock is a good thing, says Michael Hydeck, CR, CKBR, president of Hydeck & Mackay Builders in Telford, Penn. "Because of the slowdown in the building market, people are more apt to repair and improve the home, and stay there. If you're a good remodeler, you're always going to be in business." The small firm is currently working on a large addition, among other projects.
- South. The housing downturn is weathering the storm better here than in other regions. Consultant Jesse Morado, CR, works with consumers and remodelers as the Renovation Coach, in Atlanta He characterizes the local economy as "steady and balancing," and notes a glut of resale homes are well-priced. "Homeowners are generally opting for lower-end projects like updating kitchens, replacing roofs, adding porches and smaller rooms."
- Southwest. Paul Zuch, CR, CGB, president of Capital Improvements Design/Build in Allen, Texas, focuses on the upscale market and only this summer has seen things slow down after a robust first half. "In some cases, the housing slowdown has caused people to delay their projects," he says.
- West. Everett Collier, CR, partner at design/build firm Collier-Ostrom Inc. in San Francisco, says that his company derives most of its business in the upscale market. Collier says finding skilled laborers, such as lead carpenters, are a bigger concern than booking more business. "A soft market can increase the remodeler's work," Collier says, noting he hasn't seen lead calls drop off. Business is booked six to eight months out. "Other contractors in the area have said they've seen a little slowdown, though."
Perhaps Collier summed up the overall outlook best:"Given the aging housing stock and demand to build more housing, it's a bright future for the remodeling industry."
Marcia Jedd writes frequently about housing and construction.
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