An old maxim says that every trend ends with an extreme. Though the rule applies more readily to lapels and hemlines, it seems also to hold true for the remodeling market.
Sometime between early 2002 and late 2006, or roughly the five years spanning the economic rebound after the September 11 terrorist attacks to the start of the present housing downturn, many remodeling companies (maybe even most) reached their high-water mark. Actually, that's an understatement; they reached a performance extreme that annihilated established benchmarks.
Take annual revenue. In an industry where 10% annual growth is respectable and 20% growth is superlative, remodeling companies reported year-over-year gains of 30%, 40%, and more. That kind of growth is astounding, and under normal circumstances it would be considered risky.
But circumstances in those five years were far from normal. These otherwise incomprehensible growth rates became almost commonplace due to a second equally unlikely statistical extreme: the increase in average job size to three, four, and five times historical averages. Whether the jump was from $20,000 jobs to $100,000 jobs, or from $75,000 jobs to projects costing upward of $500,000, it all happened in the span of a few building seasons — what amounts to overnight compared with the glacial pace of historical trends in the industry.
Changes this dramatic would, under normal circumstances, set off a few alarms, but they never did because the reasons seemed obvious to everyone. The growth in homeowner spending on whole-house remodels and gigantic multiroom additions was rooted in two additional extremes: historical highs in property values and historical lows in mortgage rates.
Small wonder, then, that many remodeling companies also reported record highs in net profits — in some cases, two, three, or four times the historical average. But these miraculous profits seemed merely extraordinary when juxtaposed against yet another extreme: the long lines of homeowners waiting in 6-, 10-, 12-, and sometimes 16-month backlogs.
UPBEAT REALISM Now that we're on the other side of the wave, all of the trends have set off in the opposite direction. Annual revenue for 2007 is mostly down; so are job sizes, housing values, profits, and consumer confidence. If the rule of trends still applies and the trend at the moment is down, then the safest course seems to be to expect things to get worse before they get better.
That doesn't mean I agree with the sensationalism in much of the reporting on the housing downturn. And I'm not denying that all of the negativity in the newspapers and on TV is making consumers nervous and possibly extending, if not actually deepening, the economic downturn. And yes, I think remodelers need to stay positive.
What worries me, though, is that optimism will replace realism, the way it did during the five-year upturn. It was optimism that pushed many companies out of their sweet spot. It was optimism that supported the rapid growth that put a strain on people and processes. And it was optimism that sent those record profits not into a rainy-day fund, but into new trucks, new tools, new office space.
So let's be upbeat but realistic. The remodeling industry is still growing, but at a much slower pace. The market will improve, but we won't be breaking records every year. Job sizes will creep back up, but slowly (and more predictably, I hope).
Surviving a slowdown is a struggle, but it is also an opportunity to take stock. Were those big projects really the moneymakers you thought they were or was it the smaller stuff that paid off? Was that 12-month backlog really such a good thing or did it close out too many opportunities? Was subbing out all that work really better than developing the capability in-house?
The gift of a slowdown is time to ask questions. The answers will help keep you from bouncing back and forth between extremes.
Sal Alfano, Editorial Director