On a national scale, remodeling and replacement activity remained steady in Q1 2012, according to the latest Residential Remodeling Index (RRI) by Hanley Wood. “Our forecast for 2012 is still positive but has been revised down,” says Jonathan Smoke, Hanley Wood’s executive director of research. “The revised forecast calls for more growth in 2013 and 2014 than we had been forecasting previously.”

However, several local markets in all parts of the country — from Seattle to Atlanta — could see significant increases in activity. “The healthiest markets are moving toward recovery and seeing increased activity,” Smoke says. “The markets not in recovery mode are frozen or seeing some declines.” He added that the national numbers can be a little bit misleading because it says that nothing is changing when in fact some markets have seen improvement.

The seasonally adjusted first quarter national composite of the RRI registered a score of 82.34, which was a very slight decline of 0.04% over the revised fourth quarter result of 82.38. The RRI ended up seeing no growth, according to Smoke, who was quick to add that it was “no loss either; it was flat. So it’s still accurate to say we bottomed out at the end of [2011], but on a seasonally adjusted basis we are not seeing improvement at a national level so far this year.”

A Second Bottom

Although the year-over-year decline in remodeling activity was 2.6%, it is less than the 3.6% year-over-year decline in Q4 2011 which indicates that remodeling and replacement activity has hit a second bottom. The volume of projects is down 18% from peak levels in Q1 2007. “Essentially every quarter last year saw lower levels of activity and there were a variety of reasons why that happened,” Smoke says. “Most were economic and relating to the housing market, but also consumer confidence was not very strong and there’s definitely a correlation between all of those things.” As these outliers start to stabilize, Smoke says the effect is that Q1 2012 has seen the same level of activity as Q4 2011, at least on a national level. “It’s not slowing down and it’s not speeding up.”

On the brighter side, the new RRI data indicate that a majority of local markets — referred to as Metropolitan Statistical Areas (MSAs) — will have an increase in remodeling projects for the rest of the year. Out of 366 MSAs, 197 are now expected to see more remodeling and replacement projects in 2012 than in 2011. The average forecasted increase in those improving markets is 4.1%. Some of the largest markets with expected growth include Chicago, Atlanta, Minneapolis, Seattle, and Cleveland.

Stimulus Hangover

In 2011 there was a 5% decline in remodeling and replacement projects from 2010 (from 10.5 million to just over 10 million). The slight recovery in 2010 from 2009 was partly due to the Federal government's helping hand — the tax credits for energy-related home improvements as well as home-buyer tax credits, all of which expired in 2010. “The stimulus clearly did have an impact and that’s why we’re going through the second bottom,” Smoke says.

“We have a hangover from the effect of the stimulus going away, but keep in mind this happened just six months ahead of when consumer confidence started to tank because of the earthquake in Japan, the debt crisis in Europe, and our own Congress almost shutting down the federal government last summer,” he says. “So it’s not all the effect of the hangover from the stimulus.” He added that the expiring tax credits pushed remodeling activity and home buying into 2010, some of which would normally have taken place in 2011.

Smoke says that the second quarter of this year will be the bellwether for the rest of 2012; if there is no increase in remodeling activity then growth for the rest of the year seems unlikely. The traditional seasonality of the market as well as the election in November and focusing on what Congress will do about tax policy after the election will more than likely see a slowing of activity. “I’m optimistic,” Smoke admits. “Our forecast is clearly positive in and of itself. We don’t put an optimistic or pessimistic spin on the forecast; the model spits out what it thinks it’s going to do and I’m hoping it’s correct.”

About the Residential Remodeling Index: The RRI is a quarterly measure of the level of remodeling activity in 366 metropolitan statistical areas in the U.S., with the national composite reflecting the national level of activity. “Activity” includes home improvement and replacement projects, but does not include maintenance or projects of less than $500. The seasonally adjusted index shows the relative level of activity in the geography specified (MSA or national composite) compared with 2007 (the baseline year). A number above 100 indicates a level of remodeling activity higher than the level of activity at the beginning of 2007, which was the peak of remodeling activity in the prior decade.

The index is produced through a statistical model that leverages detailed data on remodeling activity, including household-level remodeling permits and consumer reported remodeling and replacement projects. Quarterly historical results for the national composite and for each of the 366 Metropolitan Statistical Areas in the U.S. are available back to 2004.

—Mark A. Newman, senior editor, REMODELING.