Recent financial activity would indicate that tougher times may lie ahead. Hope is not lost, but increased market awareness must be found.

In an effort to curb inflation, the Federal Reserve increased the targeted federal funds rate a quarter of a basis point to 4%, the highest level since 2001. The increase wasn't unexpected — in fact, it's the 12th consecutive time that the Fed has raised the rate. However, Frank Nothaft, chief economist for Freddie Mac, suggests in his online commentary on key housing trends that it may cause a shift in the way homeowners finance their remodel or home improvement projects. Cash-out refinancing offers a comparatively favorable alternative to home equity loans that are indexed to short-term interest rates, and third-quarter data compiled by Freddie Mac indeed indicates strong cash-out refi activity.

Softening Housing Market Another concern is that activity in the housing market has weakened slightly, according to the latest preliminary data available as this magazine goes to print. The National Association of Realtors' pending home-sales index for September, though the second highest on record, is down 0.3% from August. Existing-home sales for September are on plateau with August sales of 7.28 million, yet they are 7.2% higher than last year at this time. Though the sales price of existing homes dipped to $212,000 for September from August's record $220,000, this price tag is 13.4% higher than the median price in September, 2004. The fact that these numbers are so strong compared with last year but are weakening from month to month suggests that the housing market's remarkable performance in past years may have reached its growth-rate limit.

What It Means For Remodelers What are the implications of the housing market's growth peak for the remodeling industry? Kermit Baker, senior research fellow at Harvard University's Joint Center for Housing Studies and director of its Remodeling Futures Program, notes that while the housing data reflect short-term fluctuations in the existing-home market, there is some evidence that things are starting to ease off on the construction side as well. Because the remodeling industry does not have a leading indicator — the Joint Center is in the process of developing one — it is unclear whether softening in the housing market will also signal a slowing for the remodeling industry, Baker adds. “It's generally the case that the trends [remodeling and housing activity] mimic each other very well,” he says.

To protect your company from a possible downturn, Baker advises monitoring activity more closely, focusing on existing projects and not assuming new work is coming in, not over committing to labor, and being more tentative with leads since, he says, “Consumers step back, too, when the market weakens.” But above all, Baker advises, watch local market conditions. “Even if there's a softening in the market, it will undoubtedly be regional,” he says. “In a modest downturn, many markets won't feel it at all.”