Full House

We've recently written quite a bit about the big slowdown in the new-home industry and its effects on remodeling activity. Although it's hard to draw a concrete conclusion, the consensus among remodelers and industry analysts is that remodeling isn't expected to fall nearly as hard as home building has. Furthermore, the level to which remodeling activity does drop is likely to be favorable when put in historical perspective. Other factors, such as decreasing home values in some areas of the country, may even be a boon to remodeling, as “trading up” becomes a less attractive option for homeowners.

However, the overall slumping of the housing market has implications beyond the public's attitude toward investing in their homes. The news is both good and bad, but it all centers around one of the biggest industry issues in recent years: labor.

The good news first, if you can consider tens of thousands of people being laid off “good”: Lost jobs in new construction help the labor shortage for remodelers. Between September 2006 and January 2007 (the last month for which data was available as of press time), residential construction recorded a net loss of more than 53,000 jobs, according to preliminary data from the U.S. Bureau of Labor Statistics (BLS).

That number isn't broken down between new-home building and remodeling, but stray reports of cutbacks at major builders and the steady pulse of the remodeling industry suggest that most of the jobs are being lost on the new-construction side. According to a December article in BIG BUILDER magazine (which, like REMODELING, is published by Hanley Wood) Beazer Homes USA laid off 1,000 people — roughly a quarter of its workforce; WCI Communities planned to cut back by 15%; Standard Pacific Corp. was laying off 10% of its employees; and Toll Brothers and Technical Olympic USA also announced staffing reductions.

Of course, not all of those laid off are field employees, and many who are will look for other kinds of work. Still others won't have the skill set necessary for remodeling. However, some percentage will. And with new-home builders cutting back, new entrants into the construction market will turn to remodeling companies in their job searches.

Chris Landis, co-owner of Landis Construction Corp., a design/ build company in Washington, D.C., said his company recently hired four field employees — two leads, one carpenter, and a helper/ laborer — in one month. That kind of expansion would have been unthinkable just months earlier, when the industry was facing a major labor crunch.

The increase in available labor is even more pronounced when you look at trade contractors. According to the January BLS data, “specialty trade contracting” had lost 104,000 jobs from a peak in February 2006. And with new-home sales down and spec builders looking to get rid of inventory, trade contractors still in business are more available than ever to work on remodeling projects. “We've had the pick of the litter for the last three months,” says Michael Turner, president of Turner Exteriors, a Middletown, Conn., company that does mostly window, siding, and roofing replacement.

In one instance, a siding crew that had turned down work two months earlier came back to Turner to see if he had anything for them. “The big developers have stopped,” Turner says, explaining why trades have open schedules.

There is also a downside to all of this: With so many craftsmen and tradesmen out of or short on work, a number go into business for themselves — as remodelers. “There's more competition,” says Calvin Stewart, of Calvin Stewart Construction, in Maumee, Ohio.

These newcomers generally gain market share rapidly by lowballing — not necessarily on purpose, but often because they don't fully understand proper pricing and markup. This presents a challenge to the remodeler who sells on quality and service, not price. That's particularly true for those who specialize in smaller jobs, such as basements or window replacement. “Everybody thinks they can do those,” Stewart says, and that's often the attitude the general public takes as well. Stewart says that homeowners seem to be choosing remodelers based on price more than usual, so smaller companies should be prepared to “justify” their prices to homeowners more than before.

Larger remodelers and design/build companies are also experiencing a more crowded marketplace for the bigger, more expensive, more intricate projects. Landis makes a point to contact homeowners who don't use his company for their project, and one of the questions he asks is which company they did go with. “On this last go-round, I didn't recognize as many [companies] as I usually do,” he says.

Of course, the new competition in this arena isn't generally out-of-work carpenters. Rather, it's custom and spec builders looking to diversify to stay afloat as their new-home business temporarily dries up.

Larry Cafritz, of Laurence Cafritz Builders, in Bethesda, Md., does a combination of custom homes, spec homes, and remodeling. In a normal year, he says, 10% of his total volume comes from remodeling. “This year, it'll be more like 50%,” he says. “I've been doing almost exclusively [spec] homes since 2000,” Cafritz continues. “Now as the market gets slower and more risky, I'm focused more on custom homes and custom remodeling.”

Cafritz doesn't think he's alone, either. “It's a trend,” he says. “A lot of builders are going to have to do that if they want to manage their risks.”

Leo Schwartz, of Bethesda, Md., custom builder Edgewood Builders, says that his company's relatively small size — he only builds two or three homes a year — means that he doesn't have to worry too much, but he notes that the market in general “absolutely has experienced a slowdown.” His observations of the industry match what Cafritz is doing. “There's a pretty good segment of guys who have always done all three,” he says, referring to spec homes, custom homes, and remodeling. “They have other aspects of their business to lean on,” he says, “and they're leaning on [remodeling] a little harder right now.”

There are a fair number of new entrants into the marketplace, however, who — unlike Cafritz — have no remodeling experience. Whatever threat they pose to established home improvement companies is likely to be short-term. “Remodeling has always been more challenging than building new,” Cafritz says. “It's more time-consuming and detail-oriented. It will be a learning curve for those who want to stay in the business.”

The mistakes the newcomers are likely to make — underbidding a job because they grossly underestimate the amount of time needed for a remodel, for instance — will make their bids low, and established remodelers may find themselves losing a job here and there on price alone. But the very same mistakes that earn them a job will ultimately lead to the lowballing company's demise. “Some people might just go out of business,” Cafritz says.