The third-quarter release of a key indicator reveals that remodeling activity was down by 1.4% over the most recent four-quarter period. The mid-October version of the Leading Indicator for Remodeling Activity (LIRA) also predicts that the decrease will continue — to a greater degree, in fact — until at least the second quarter of 2008 (see graph at right).

Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies (JCHS) at Harvard University — the organization that compiles the LIRA — points out that “the numbers aren't very different from the second quarter,” when remodeling activity posted a 1% gain over a four-quarter period. However, he concedes that there is significant psychological impact from the slip into negative territory. “It's much easier to stomach weak growth,” he says, than declines. “People get very nervous about that.”

That's particularly true, Baker continues, when “there isn't any evidence that we're at a turning point yet.” He doesn't rule out the possibility, but says that it would be “unusual” for the trend to reverse itself and for the LIRA to move into positive territory by the end of 2008.

Though the latest LIRA is the first to attach a negative number to the remodeling industry, the somewhat bleak outlook isn't breaking news. Remodelers in most areas of the country have been experiencing slowdowns for some time now. That's not to say that remodeling work will dry up to the extent that the new-home market has. “If remodeling is a $300 billion industry,” Baker says, using a round estimation of the money spent annually on home improvement products and services, “that's still a lot of sales if it drops 5%.”

It does mean that the remodeling market is headed for some change, however. Baker, in a seminar he co-led with the National Association of Home Builders' Gopal Ahluwalia at last month's Remodeling Show in Las Vegas, enumerated some of those adjustments.

Third Quarter Leading Indicator for Remodeling Activity
Joint Center for Housing Studies Third Quarter Leading Indicator for Remodeling Activity

HOPE FOR RECOVERY One of the more interesting things about the remodeling market during the current decade is its performance relative to the national economy. In 2001, the country was in a recession, and the following two years saw very slow growth overall. Of course, this coincided with a boom period for remodeling — fueled by favorable lending standards. Currently, though concerns that the housing industry may actually pull the nation into recession have heated up in the last several months, the economy is in a period of (admittedly weak) expansion.

This isn't the norm: Baker says that the average annual growth rate for remodeling during a time of economic expansion is 6.7%, compared with 2.3% during a recession. While a departure from the norm can often be bad news — “if it ain't broke, don't fix it” — Baker says it's a positive sign in this particular case. “That we're going through a transition while the economy is in expansion holds out hope [for recovery],” he says. “It would be a lot worse during a recession.”

One characteristic of the easing of remodeling spending — which began in the third quarter of last year — is that in addition to homeowners being less willing to make improvements to their homes, those projects that they end up doing are smaller than the jobs remodelers took just a few years ago. Data from the Cost vs. Value Report (see page 65) shows that higher-priced remodeling projects are recouping less of the cost of the job in 2007. In 2003, the average return on investment after one year across all upscale remodeling projects included in the survey was 82.5% of the cost to build. That dropped to 80.7% in 2004 and 2005, then 75.5% last year, and now to 70% in 2007.