Despite previous signs that home improvement spending was on the rise, new data from the Leading Indicator of Remodeling Activity (LIRA) released today shows that the next several quarters will see weak, if not volatile, spending in this sector. Released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, LIRA is projecting that annual remodeling spending could be down by 4% through the first quarter of 2012. LIRA, an estimate of national homeowner spending on improvements for the current quarter and subsequent three quarters, provides a short-term outlook of homeowner remodeling activity.

According to Kermit Baker, director of the Remodeling Futures Program at Harvard University, LIRA is lagging based on the indicator’s own data, most of which is from general housing market conditions. “Existing home sales and housing starts have been very disappointing and have not rebounded as we had hoped,” he says. “The NAHB’s [National Association of Home Builders] Remodeling Index [RMI]cretxbcqrwcrybebutyr is another factor and it’s just barely getting back to approaching the breakeven point after a very steep decline.” He added that mortgage rates are another component of the LIRA and have held steady, but that “nothing else is creating any upward pressure in terms of pushing activity forward.”

Nervous Consumers

House prices, unexpectedly weak recently, are not a component of the LIRA but they do influence a lot of other factors that are used, according to Baker. “When it looked like we hit the bottom before, it now looks like [house prices] are going to edge down a few percentage points before they hit bottom,” he says. “So we still have this stock of depressed properties out there making households nervous. A lot of folks that would like to get into the market are unable to do so because they’re so far underwater and they won’t get back to the surface again until we see some stability in house prices.”

Baker believes nothing will get better until the consumer feels better about spending again. Since mortgage rates are very favorable and house prices are at almost record lows, now is an ideal time for a home buyer to enter the market. However, they are staying away in droves because of fear: fear that prices will go even lower, so why not wait? Similarly, there is the fear that if they do buy a house now and the prices decrease, they will lose value in their new home. “People are very nervous about the investment implications of buying a home and are standing on the sidelines until they get the sense that things have been resolved,” Baker explains.

He says that consumer nervousness will abate when one thing happens: inflation. “What it’s going to take is some uptick in mortgage rates and house prices for folks to say ‘It looks like we hit the bottom and there’s no risk anymore, so we better buy now before they go up even higher,’” Baker says. “That’s generally what triggers activity in the market. I’m guessing that’s what’s going on now.”

Big-Ticket Remodeling Slides

Traditionally, in past economic cycles when new-home sales were stalling it would sometimes mean a boon, or at least a lack of bust, for the remodeling industry as consumers, who might have been eyeing that McMansion on the hill, opt instead to invest in their own homes with a few bump-outs and some remodeling. However, Baker feels that there has been a lack of the higher end, discretionary projects that have typically fueled the numbers in the remodeling industry. “People are doing and will continue to do the typical replacement projects,” he says. “That stuff is pretty stable over the cycle and with high energy costs, they’re going to continue to undertake those projects.”

The mid- to lower-level discretionary projects such as bathroom and kitchen remodels and more focused room additions are still thriving, but those projects in the $50,000 to $100,000 range and beyond are being curtailed based on the same sort of nervousness found among potential home buyers, not to mention banks that are not eager to issue home improvement loans. A homeowner may want to undertake a big-ticket remodel but is antsy about investing at that level for fear of not recouping the costs when it comes time to sell.

Baker does say that households who would like to trade up are realizing that since they will be in their current home a while longer, they will undertake remodeling projects they might not have normally done. “Still,” he adds, “a big segment [of the homeowner population] is really steering clear [of remodeling projects] and the net result is that we aren’t seeing any significant growth in the market.”

Filling a Niche

While growth is predicted to slow into next year, according to the LIRA, at least it is not declining. “We’re not losing steam anymore,” Baker says. “But we’re not picking up the way we hoped we would. There are pockets where the market is strong in areas where the economy is relatively strong. It’s very difficult to find projects in markets that have a high level of distressed properties.” He adds that these distressed properties are creating new opportunities for remodelers. After banks foreclose on a home and prepare to put it back on the market, they are getting remodelers and other contractors to fix them up. However, Baker cautions, “these are more cosmetic fixes. Although that’s creating a new opportunity, I don’t think a bank is getting ready to put a home back out on the market with a $100,000 room addition.”

But a niche market is a niche market and Baker has heard of a lot of contractors doing well in that particular segment, but they are not doing traditional remodeling jobs (kitchens, baths, additions, etc.). In stronger markets, he says that remodelers are holding their own. “The energy efficiency markets seem to be doing pretty well,” he says. “The replacement market seems to be doing pretty well. It’s the design/build guys who are finding limited opportunities out there for the projects that were really sustaining them prior to the recession in the housing market.”

—Mark A. Newman, senior editor, REMODELING.