Several years ago, economists at Harvard's Remodeling Futures Program believed home remodeling was counter-cyclical to new construction. In other words, they thought that remodeling surged when new home construction starts fell off, and vice versa. After studying the numbers over longer cycles, however, they concluded that remodeling and new residential construction, although not perfectly aligned, follow similar cycles. But the peaks and valleys of the cycles, which represent the high and low points of activity, are still very different (see chart, right). New construction has higher peaks, as demonstrated by the past few record-breaking years. But when interest rates jump or the economy stalls, new construction can also dip into the lowest valleys.
Different Waves Remodeling businesses experience this same up-and-down fluctuation but, unlike new residential construction, the extremes vary dramatically depending on which segment of the remodeling industry you look at. The peaks and valleys for large design/ build remodeling, for example, are the largest in the industry, but are still not as great as in new construction. When interest rates go up, remodeling projects are not as strongly affected as new construction projects. Smaller-scale projects, simpler financing tools, and other factors all contribute to making design/build remodeling more stable than new construction.
Specialty remodeling is another segment to look at with this filter. It also has peaks and valleys, but again the extremes are not as great as new construction or design/build. Some of this difference can be explained by the non-discretionary nature of most of these projects. For instance, a homeowner with worn-out bathroom fixtures does not typically ask to see consumer confidence ratings or other key economic indicators before deciding to renovate the bath. These projects are also smaller in scale, easier to finance, and of shorter duration. All of these factors make the world of specialty remodeling more stable.
The last category to examine is repair/maintenance. Activity in this category is the most stable, with small fluctuations in response to market changes. As with specialty projects, some repairs are necessary no matter what the larger economy is doing. Other factors, such as the small cost, the increase in aging housing stock, and a homeowner population lacking the time or skill to tackle these projects, create a business model with far less extreme peaks and valleys.
Riding The Cycles Why are these comparisons important? Peaks and valleys represent risk. The less extreme the fluctuations are, the less risk your market has. Just as you know that investing in a CD is less risky than most stocks, you should be aware of your risks in the remodeling business and learn to manage them.
One strategy is to stay within your segment but make adjustments to even out the fluctuations. A design/build firm, for example, may want to swing for the fences when the economy is strong but focus on simpler projects when the market begins to soften. A specialty remodeler may adjust its marketing message to counter a slowdown.
But the ideal strategy is to create a blend of activities that includes all three remodeling categories. Like a balanced portfolio, it will allow you to control your future and help keep you and your team from backsliding in the off cycles. —Mark Richardson is president of Case Design/Remodeling and Case Handyman Services, Bethesda, Md., and author of 30-Day Remodeling Fitness Program. 301.229.4600; firstname.lastname@example.org.