Remodelers on the Rebound

Written by: Steve Cook   Sun, May 24, 2009 Beyond Today’s News, Consumer Report, Crisis Watch

There’s an old construction industry adage that goes something like this: when home builders prosper, remodelers have hard times and when remodelers are doing well, it’s a bad market for builders. 

Not this time.  This recession practices equal-time suffering-for builders, remodelers, and the building products manufacturer and home improvement retailers that supply them.  Scratch one more industry adage proved wrong by the worst real estate economy of our time.

 When the real estate market is bad, homeowners are supposed to stay put and add a room or finish out a basement if they need more room. When prices and rates are good, they buy new homes.  Over the past year the double whammy of real estate recession and economic crisis hit the two industries at the same time in different ways, compounding the negative impact for both, and for the building products they consume.  That the remodeling market doubled from 1995 to 2007 made the fall especially painful.

 Instead of investing in their homes when the real estate boom ended in 2006, most homeowners saw that home values were softening and put their money elsewhere.  Where values stayed strong, however, business was good. The hottest home improvement markets in 2007 places like Phoenix, Miami. Seattle, Washington, San Francisco and Boston, were also leading the nation in home values. “Buoyed by continuing strong demand for minor additions and alterations, the remodeling market is expected to end the year in pretty good shape,” said National Association of Home Builders’ Remodelers Chairman Mike Nagel, CGR, CAPS, in late 2007.

 When the stock market crumpled last September and the economy went into a tailspin, homeowners canceled projects coast-to-coast.  The unprecedented deterioration in homeowner equity caused by sinking home values over the past 12 months wiped out the equity needed to qualify for home equity loans and lines of credit, the favored method to pay for renovations. Tight credit and new lending standards also made it difficult for homeowners to get loans.

 Remodelers, whose business had already started to slip at the height of the boom in 2005 according to the NAHB’s Remodeling Market Index, began a long, slow slide downward.  NAHB’s Index experienced further declines in the second quarter of 2007 for both the current market conditions and future expectations components of the index. By August, 2008 remodelers were experiencing slower activity in markets nationwide, particularly for major improvements to owner-occupied housing. From its peak the previous year, homeowner improvement spending dropped 16 percent by the third quarter of 2008.

 The retailers that supply remodeling contractors had a nightmarish 2008 as well.  Lowe’s net earnings for the fiscal fourth quarter ended Jan. 30 sank 60.3% from the year-earlier period to $162 million on a 3.8% decline in sales to $9.98 billion.

Larry Stone, Lowe’s president and chief operating officer, told analysts during a conference call that one reason why sales fell was that customers were doing fewer big-ticket renovation projects, such as kitchen projects. Similarly, Lowe’s revenue for installed sales projects, such as carpet and window installations, declined 14.4% in the fourth quarter from the previous year and was down 6% for the year. Discretionary expenditures accounted in 2006 for 45% of sales, he said. Now, they account for about one-third of sales. “[Customers are] hesitant to invest in large projects,” he said.

Home Depot hasn’t fared any better.  Its net loss in the fourth quarter of 2008 was $54 million, or 3 cents a share. Revenues of $14.6 billion were down 17.3 percent from the fourth quarter of 2007. 9.7% from 1Q08.  A fall-off in big ticket items and professional sales did not stop earnings from improving in the first quarter of this year.

“Since their house is the largest asset that most Americans have, the fact that they would let it go to pot is extraordinary. It is an excellent indication of how broke people really are,” commented one stock blog.

 The pent-up demand for maintenance is one reason remodelers are starting to smile.  Equally important is the emergency of new markets, which will grow as the economy improves.  A recent study by the Joint Center for Housing Studies of Harvard University, “The Remodeling Market in Transition,” outlined several opportunities for growth.

Rental.  The collapse of the ownership market has put pressure on the rental stock, much of which is aging; only 15 percent of rental units have been built since 1990.  However, until the excess inventory of for-sale properties is absorbed, many of these homes will be at least temporarily converted to rentals and investment in existing apartment complexes will ne delayed.

Immigrants.  Spending by immigrant homeowners on home improvements are growing 13 percent per year since 2000 despite the economy-well in excess of the 7 percent among the domestic-born population. Immigrants represent more than 20 percent of the population between the ages of 30 and 44, the years when families are typically growing. This age group traditionally spends heavily on home improvements. Recent Census Bureau projections indicate that the immigrant share of population growth will expand to about 44 percent by 2010 and almost 50 percent by 2025.  As they form households and buy homes, immigrants are likely to account for similar shares of the growth in remodeling.

Sustainable Remodeling.  “Green” remodeling is no longer a fad, it’s a big business that’s getting bigger.   Consumer interest in green remodeling is widespread and increas­ing. Sustainability and energy efficiency offer the homeowner or rental property owner additional motivation for undertak­ing home improvement projects. With younger age groups expressing particular interest in green projects, this market holds promise for growth for many years to come.

Building prod­uct manufacturers and distributors are offering a broader range of environmentally sensitive products and remodeling contractors are tapping into this market.

 After two tough years, things are starting to look up for remodelers.  NAHB’s index is showing some signs of life during the first quarter.  “Remodelers are starting to receive more calls for bids and requests for proposals, although getting customers to sign for a job continues to remain a challenge,” said NAHB Remodelers Chairman Greg Miedema, CGR, CGB, CAPS, CGP, a remodeler from Tucson, Ariz. “While the size of the jobs is smaller, remodelers are optimistic about this uptick in market activity.”

 With the overall economy expected to strengthen before home values, remodelers will probably recover before builders, but it’s probably fair to say that the remodeling business will not be quite the same.  Builders have entered remodeling to diversify their revenue base.  The hard times and heightened competition have brought about consolidation among general and specialty contractors.  New markets will spawn new specialties.  Contractors will be leaner and meaner.  And with the passage of time, the housing stock will grow older and need remodeling more than ever.

 Here is the Joint Center study.   r09-1_remodel_study.pdf

Leave a Reply