Larry Closs thought a lot about selling sunrooms. But when Michigan sunroom manufacturer TEMO approached him in 2007 to take on its line, the Louisiana home improvement contractor passed. “I knew something was going to happen,” Closs says.
Something did: the recession. And during the recession, big-ticket home improvements such as sunrooms and basements proved particularly vulnerable. Such products were viewed by consumers as discretionary purchases. Often they were bought on credit. And as credit tightened in 2009 and 2010, sales of sunrooms and basements, among other products, dropped off. Some manufacturers and dealers left the market entirely.
TEMO came back to Closs every year seeking his business, and Closs kept turning the sunroom supplier down—until 2012.
Today, New Bath, Closs’ Baton Rouge, La., company, which sells kitchens, baths, and windows, is the second largest TEMO sunroom dealer in the U.S. thanks to financing. Home improvement lending, Closs and other company owners say, is back, and it’s back in a big way.
Now You See It, Now You Don’t
Other home improvement companies report similar. Even those carrying products that would be considered discretionary purchases—compared with, for instance, roofing—say that money is available and that consumers are interested. Interested, that is, if they know about financing options.
This year, for instance, Nick Richmond, owner of Matrix Basement Systems, in Chicago, is on target to produce $11 million in sales of basement finishing projects. Many retail basement finishing companies went out of business during the recession due to lack of available credit. But Richmond, who started his company in 2009, built it on financing and today works with seven different home improvement lenders to get eligible homeowners the loans they need to pay for his product. Some 75% of the company’s sales are financed.
Owners and managers at older companies have longer memories. Fred Finn, president of roofing, siding, and window company Euro-Tech, also in Chicago, recalls the period before the recession when 85% of the business written by his sales reps was financed. Then credit tightened, and bank turn-downs became commonplace, while loan programs disappeared. “The worst years were ’09, ’10, and ’11,” Finn says. “At one point, we were down to a single lender. We were selling a lot more cash business.” Today, however, “I’m guessing that we’re back in that 75% to 80% (financed) category.”
Others home improvement company owners tell a similar tale. At the Chicago window replacement company Feldco, president Doug Cook says that in the period prior to the recession, about 40% of his company’s sales were financed. That dropped to the high teens in the years after the 2008 crash, and today has swung back up to the mid-30s. Now, Cook adds, “There’s no question that financing is back.”
Credit Availability: Night and Day
But what’s back is not necessarily what was there before. Money is available, and lenders are eager to sign companies on. “Banks that wouldn’t even talk to you about it a few years ago are wearing me out now with calls,” says Brian Brock, general manager for Hullco Exteriors, in Chattanooga, Tenn., where roughly 25% of the company’s $6 million in sales this year will be financed.
But, say company owners, some of the players are different, some of the products are different, and the mindset of homeowners with regard to borrowing is also different from what it was during what’s been referred to as “the Roaring 2000s.”
Front-line lenders G.E. Capital, Wells Fargo, and Enerbank dominate the market, but more recent arrivals such as Green Sky, out of Atlanta, and Service Finance Co., out of Florida, are aggressively courting home improvement companies.
Mark Berch, president of Service Finance, describes the difference in credit availability now versus just a few years ago as “night and day.” There are, he says, “more [loan] products available today than there were at the advent of the crisis. It’s not as loose as it was in 2006 and 2007,” he says, “but there are programs that can handle almost every level of credit. There are 15-year loans, low-interest loans, zero-percent loans with payment deferred out to 24 months. It’s all there,” Berch says, “for every kind of buyer”—including the one who is well-off.
Affluent Buyers Use Financing Too
The cliché has long held that those who opt to use financing to pay for windows, siding, roofing, or any other type of home improvement are people who can’t afford to write a check for the work.
But Closs says that he recently conducted focus groups—including one with affluent buyers—in which the affluent expressed their preference for paying for their purchase with a no interest/no payment loan. So-called “No/No loans,” which make it easy and convenient for people who already have money to buy a home-improvement job using someone else’s—i.e., the bank’s money—are often desired by upper-end homeowners.
The sales manager of one Maryland company, which finances a quarter of its business, estimates that three-quarters of those loans are No/No loans. Buyers agree to pay back the full amount of the loan a year after the transaction date. In the meantime, they pay no interest on what they’ve borrowed and are obliged to make no payments until the full loan amount of the loan comes due. The home improvement contractor pays a fee in the form of a percentage of the loan, built into the pricing of the job so that contractors can recoup their costs.
Risk-Averse Consumers Loosening Up
But while the loans are there, the desire of the average homeowner to finance a big-ticket purchase such as a kitchen or a roof may not be. Many remain wary of taking on what they see as the risk of additional debt obligations. Consumer debt peaked during the third quarter of 2008—at exactly the time when financial institutions were failing—at $12.68 trillion. Five years later, at the end of 2013, it remains 11% below that peak. But indicators point to a less wary attitude toward borrowing and toward risk.
Last year auto lending and mortgage lending increased, though credit card spending did not. “Slow job growth and small wage gains have made many Americans more reluctant to charge goods and services,” notes a story in the Associated Press last year. But some see that changing. “Consumers were saying: We don’t want to take on more debt,” says Bill Simone, vice president of HomePlus Finance, in Los Angeles. “Now it’s swinging the other way.”
Swinging, yes, but it’s not quite there yet. Gone are the days of refinancing the house to make way for a home-improvement purchase, which Berch calls “musical chairs.” Consumers, he says, aren’t taking loans any more that they can’t afford. They recall foreclosures, “and they don’t want to be embarrassed—as they were in 2009 when they thought they had a good credit score and were declined.”
And in any case, the market for home improvement financing may be robust, but many homeowners aren’t even aware of it. Which makes it up to the companies using financing, he says, to train salespeople in how to offer it, build loan products into the sales process, and market around the fact that payment plans are available and are easy to use.
That’s what Hullco did earlier this year, promoting five-year/no interest financing in conjunction with the company’s appearance at the Chattanooga home show. “If you look at the furniture and auto industries, they promote no-interest offers all the time,” Brock says. “They’re the best and biggest marketers in the world. They’ve done a ton of market research, and it gets people to the furniture store and the auto dealership. Why wouldn’t it get people to buy windows?”