Even with the remodeling industry in the midst of its most challenging cyclical downturn since the early 1980s, a substantial number of home builders are diversifying into the home improvement and maintenance market, making the competition for jobs even tougher, according to remodelers attending the Sept. 9-12 Remodeling Show in Baltimore.
Home owner improvements, the key segment of the remodeling sector, were falling at a 4% annual rate by the end of last year, and that decline is expected to accelerate to a 9% pace by the end of this year and 11% during the first quarter of 2009, according to Kermit Baker, director of the Remodeling Futures Program at Harvard's Joint Center for Housing Studies.
Baker said that the industry is likely to register further declines in 2009, averaging in the mid to upper single digits for the year as a whole, "unless the economy takes a turn for the better very quickly," which appeared anything but certain in the week following the show when the U.S. financial markets suffered the worst tribulations yet of the ongoing credit crunch.
But home builders have been drawn to remodeling because the business has been holding up fairly well compared to residential construction and sales, which have taken a beating in many parts of the country, particularly on the single-family side. Green remodeling and modifications to homes to enable residents to age in place are two niches where demand appears to have been holding up better than average in today's soft marketplace.
From a peak production rate at the beginning of 2006, single-family starts have now declined by about 65% and have a bit further to fall, flattening out toward the end of this year or in early 2009, said Gopal Ahluwalia, NAHB's vice president for research.
By comparison, today's remodeling slump is expected to result in a decline of 15% to 20% from peak to trough, Baker said, reducing volume to roughly the level of 2005. "Remodeling grew 40% in the last cycle," he said, "and will lose one-third to half of that back."
Sole Income From Remodeling
In a recent NAHB survey of remodelers for the Remodeling Market Index (RMI), a quarterly gauge of conditions in the industry, 84% of those polled reported that they were seeing more home builders diversifying into remodeling, Ahluwalia said.
Half of the association's builder members are now undertaking remodeling jobs, Ahluwalia said, and once they have successfully diversified — a process that is not risk-free — they are unlikely to abandon this new sideline once the housing market regains its strength because they want to be prepared to weather the next down cycle when it inevitably arrives.
Ahluwalia said one diversified custom builder commented in the survey that, "I haven't sold one home in the last 12 months; my only income is from remodeling."
Although the RMI has drifted below 50 for three consecutive quarters, the level that is the dividing line between what's considered good and what's bad, Ahluwalia said that a solid third of survey respondents have been positive in their comments.
Those in the industry who have been looking on the bright side say that they are still finding enough lower-priced jobs to stay reasonably healthy even though requests for larger projects in the range of $20,000 and higher are significantly down.
However, for many of the remodelers who had made those larger assignments their stock in trade in the years leading up to the downturn, the abundance of smaller-scale work is providing cold comfort.
Finding New Business
Alan Hanbury, Jr., for instance, whose four-employee full-service company House of Hanbury Builders n Newington, Conn. rang up $1.5 million in business last year, complained that large projects in his area have dried up, and that's his biggest problem. "We have lots of little work," he said, "but that's not the way we're set up."
With sales typically down by one-quarter in the remodeling industry at this time, remodelers participating in a town hall discussion with Remodeling Show attendees told moderator Tom Swartz, of the J.J. Swartz Company in Decatur and Bloomington, Ill., that they have had to step up efforts to bring in new business.
"We are swinging hammers in the field," said Hanbury. His company is also banking on the reputation it has established over the years, and focusing on the base of 3,100 clients it has served. "Ramp up your Web site," he suggested. "Make it more user-friendly for getting information."
Even in good times, customer referrals are an essential component of the remodeling industry, and Ahluwalia said that his surveys have found that 96% of remodelers rely upon them.
Michael Anschel, president of the Otogawa-Anschel Design Build in Minneapolis, said that he currently is devoting about 5% of sales to marketing. He brought in $2.8 million last year and hopes to eventually grow to $5 million or more. Only about 10% of his marketing budget is being spent on print advertising, with the bulk — 80% — being targeted to past clients through blogging and networking with their families and invitations to showcase houses, dinner parties and the like.
Anschel said he isn't using direct mail, and in general he tries to "avoid things leading to small projects."
Hanbury questioned the advisability of cutting prices to survive the current decline in remodeling. "It's counterintuitive to lower prices when you have less volume," he said, adding that low-balling should scare prospective customers away, because they can figure that the contractor is cutting corners to get the job done at a rock-bottom price.
Robert Criner, of Criner Construction Company in Yorktown, Va., said that his $2 million-a-year company emphasizes value and charges accordingly. When home owners are looking for bids, "we're usually the most expensive contractor in there," he said, stressing his strengths and the weaknesses of the competition in order to land the contract.
That approach, Criner said, has worked well through thick and thin. "For the last four to five years, we have always had a backlog of business," he said, and projections for 2009 look firm.
Likewise, Anschel said that his business is already booked six months to a year out, but he is trying to bolster his sales by offering services to remodeling peers and working with architects.
Over the longer haul, both Baker and Ahluwalia indicated they have high expectations for the remodeling industry.
For years, industry analysts have been predicting that remodeling would close the gap in dollar volume with housing construction, but that goal has proved elusive. But looking at the increasing average age of the nation's existing housing stock and the demographic patterns supporting spending on remodeling, Baker suggested that the two sides of the housing industry may approach parity in a matter of years.
Proceeding at an average annual growth rate of almost 4% once it recovers, remodeling volume should rise to $402 billion by 2015, closing in on that year's projected $455 billion worth of new construction, he said. Looking at a similar timeframe, Ahluwalia said that remodeling could actually exceed residential construction.
For more information on remodeling resources available from NAHB, e-mail Kelly Mack, or call her at 800-368-5242 x8451.
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