Harvard University’s Joint Center for Housing Studies (JCHS) released its annual “State of the Nation’s Housing” report on June 23, and the news is largely bad — at least in the short term.

A snapshot of a cyclical housing market headed for rock bottom, the report describes the collapse of the recent housing bubble in painful detail. However, it also points to long-term trends that should spell a return to strength in the building and remodeling industry — especially if needed reforms are enacted.

The report focuses mainly on home building, not remodeling. But Kermit Baker, who directs the JCHS Remodeling Futures Program, says there are plenty of links between the state of the general home-building economy and the health of the remodeling sector. Unfortunately, however, many of those links are negative. “The credit crunch, and home prices falling, are key problems,” he says — homeowners are losing equity that they could otherwise reinvest in their homes, and those with equity in reserve are finding it more difficult to tap into.

The history of past recessions offers encouraging perspective about an eventual building-industry rebound. In six previous downturns, notes the Harvard study, home construction surged strongly during the first three months after the recession.
The history of past recessions offers encouraging perspective about an eventual building-industry rebound. In six previous downturns, notes the Harvard study, home construction surged strongly during the first three months after the recession.

On the other hand, some homeowners looking to upgrade their housing may find it easier these days to remodel than to trade up. “There is a bit of a gridlock out there for buying and selling homes,” Baker says. “We’ve had reports from all over that people might want to buy a home, but to do it they need to sell their current home. So they negotiate a good price on the home they want to buy, but they aren’t willing to negotiate as much on the price of their current home, and so deals fall through.”

The high sales-cancellation rates experienced by production builders may work to the benefit of small remodeling firms, as prospective buyers upgrade their existing homes instead.

Declining rates of homeownership may place more pressure on the rental housing supply, too, Baker says. Rental unit construction has lagged in the last decade, and many existing units needs upgrading and repair. “There could be some opportunities there,” he says.

Rising energy prices could also have a plus side as homeowners invest in efficiency — although that spending may lag behind the immediate emergency. “People may wait until it’s time to replace a piece of equipment,” Baker explains. “But when they do replace it they look at the energy-efficient model.”

Birth of a Downturn

As the JCHS report details, the bubble and collapse of the past four years came on the heels of a decade-long expansion in home­ownership spurred by strong economic fundamentals — low interest rates, stable home prices, a growing population, and job growth founded on rising productivity. Only at the tail end of that expansion did the market indulge in speculative excesses such as poorly documented subprime mortgage lending and mortgage derivatives trading — speculation that both fueled and fed on an unsustainable runup of house prices.

So far, the current slump’s “take-back” effect is not eroding the earlier, more solidly grounded ownership and equity gains. Still, it will take time to work out the surplus of homes built during the recent credit-fueled binge, and also to repair the damage done to financial institutions, before economic growth, household formation, and home prices can again support broad-based strength in the industry.

And nobody knows how long that will take, Baker says. “The consensus is that things should start to come back about this time next year, but that is contingent on a few things, including the condition of the broader economy. It’s a different scenario for a turnaround if we can say ‘Hey, we had a little soft spot this spring, but we’re back into growth mode this summer,’ as opposed to, ‘We’re heading into a pretty serious recession.’”

—Ted Cushman is a freelance writer in Massachusetts.