Count Basie — in accordance with the laws of gravity — told us that “what goes up, must come down.” That inevitability is proving true in the remodeling industry. The boom period that marked the first part of the century is over, and while most indicators suggest that the market is still performing well above pre-2000 levels, it's definitely on the downslope, and remodelers all over the country are feeling the effects to varying extents.
A report to be published next month by the Joint Center for Housing Studies at Harvard University (JCHS) examines the drivers of the boom, where the remodeling market will look to help it bounce back and continue to grow, and where we might end up in 2015. We don't want to give away the ending (you'll have to wait for the report to see JCHS' forecasts), but the details of the transition are worth exploring.
THE BOOM IN REVIEW To say that the market is “coming down” is not to say that the amount of remodeling activity itself is decreasing. The dollar amount spent on home maintenance, improvements, and repairs continues to rise annually. It's the rate of growth that is slowing from what it has been. “The trajectory is different than it was between 2000 and 2005,” says Kermit Baker, director of the Remodeling Futures program at JCHS. “Those were the strongest years in the history of the remodeling market.” Projected retail sales of building material for 2006 represents just under a 1% increase from the year before. In contrast, from 2000–2005, that number averaged a 4.6% annual growth.
Perhaps the single biggest driver of this prosperous period has been cash-out refinancing. Starting in 2001, encouraged by steady, low interest rates, homeowners cashed out proportionately astronomical amounts of equity in their homes compared to previous years. Freddie Mac is forecasting strong cash-out refi levels in 2006 (left, top) despite rising interest rates, but anticipates decline over the next couple of years. Note, however, that the forecast for 2008 is still more than twice as much as the actual levels of cashed-out equity in any of the years immediately preceding the boom. As shown in the chart on the bottom, home prices are beginning to appreciate at a slower rate. Homes are not depreciating in value, and aren't likely to go down in price barring a protracted national housing recession. But Baker says he does expect that appreciation rates will level out in the 3% to 5% range, which is more consistent with historical data.
SOMETHING NEW Cash-out refinancing and home appreciation rates are just two of the factors that have been driving the market and are now weakening. But that doesn't portend a doomsday scenario. Rather, it simply means that for the remodeling market to grow steadily in the future, new factors will have to propel it. The good news is that such factors do exist, and the biggest of those is the age of existing housing stock.
As shown in the graph at the left, the average amount of money spent on home maintenance and improvements rises steadily each year until the house is 20 years old or so. After that, spending falls a bit and levels off before rising again when the house gets into its sixth decade.
It turns out that houses that are now reaching the age of peak remodeling spending were built in what were record numbers for the time — the five years between 1984 and 1988. Furthermore, the large number of houses built in the last half of the 1990s and the first several years of this century should more than adequately fuel the market in coming years.
Another possible driver of remodeling activity in the near future could be an increased focus on energy efficiency. A JCHS report published in June 2006 found that there was significant lag time between rising energy costs and an increase in energy efficient home improvements. With the increase in energy costs still a relatively recent memory, it's likely that the full positive effects it will have on remodeling have yet to be seen.
RIPE FOR THE PICKING Mark Richardson, president of Case Design Remodeling, in Bethesda, Md., and a REMODELING columnist, likens the remodeling market to an apple orchard. Over the last several years, remodelers have had to put in relatively little effort to find work — like walking through an orchard and picking apples up off the ground. Now, most of those opportunities are gone, and remodelers must work harder to earn jobs. “They have to get a ladder out and climb up the trees,” Richardson says.
That may mean any number of adjustments for your business. “It's going to be harder,” Richardson says. “You'll have to be better.” What used to be a two- or three-visit close might take twice as long. Clients may be more cautious, talking to several remodeling companies as opposed to just one or two.
Richardson also suggests taking a hard look at your business model. “I think bigger projects are going to get scarcer,” he says. “If your business model is based on bigger projects, I wouldn't count on 2007 being a growth year.”