Eieio
August 12th, 2009, 05:50 PM
Contrary to popular belief, the remodeling market is not countercyclical to the housing industry, according to David Seiders, Chief Economist with the National Association of Home Builders (NAHB). As a result, overall remodeling activity has also suffered declines, falling four percent in 2007—with another seven percent drop predicted for this year.
Seiders offered his insights as part of a remodeling activity teleconference presented earlier this quarter. The panel also included Kermit Baker, Senior Research Fellow and Director of Remodeling Futures Project, Harvard University's Joint Center for Housing Studies and Lonny Rutherford, CGR, CAPS, Chairman of NAHB Remodelers and President of Legacy Construction, Farmington, New Mexico.
NAHB's Seiders said the biggest declines have been in the "home improvement" category, which are defined as additions and alterations. He predicts that this category will fall eleven percent for the year. "We do find that the most cyclical-sensitive, or volatile component of the remodeling market is improvements to owner-occupied housing—particularly big jobs," the economist explained. This segment is "about as cyclical, believe it or not, as the new home market itself."
On the other hand, "home maintenance and repair" projects, will actually register increases this year, Seiders believes. In fact, he predicts that maintenance and repair activity will lead the way in a turnaround for remodeling as a whole in 2009. Furthermore, repair of renter-occupied units will see the greatest activity, as homeownership falls and rental occupancy rates rise.
What to Watch for in Remodeling Recovery
Kermit Baker of Harvard University's Joint Center for Housing Studies, said that one of the best tools to predict remodeling activity is to closely monitor existing home sales for a region. Existing home sales act as a leading indicator for remodeling activity by about six to nine months, according to Baker. When an existing home is sold, a buzz of activity takes place on both sides of the transaction. "The seller usually does some work preparing the home for sale," he explained, "and the buyer usually does a fair amount of work to customize that home after they've purchased it." In fact, his research generally shows that "a typical home buyer will spend about twice as much on remodeling as a non-home buyer."
Home price increases and declines also help him create remodeling forecasts. Declining home values, for instance, offer "less incentive for homeowners to undertake home improvement projects," Baker said. "They're getting less return on their investment," so a lot of households wait for prices to hit bottom before undertaking some of the larger projects.
Remodeling Activity Expected to Show Improvement Starting in 2009
Industrial Midwest Poised to Fare The Best
Based on sales and pricing data around the country, Baker sees a surprising contender for a recovery in remodeling activity: the industrial Midwest. The analyst believes cities such as Indianapolis, Columbus, Pittsburgh and Buffalo ("markets that have already taken a bit of a hit," starting as early as 2005, Baker explains) may have already bottomed out and are expected to fare the best this year. Many areas in this region Several cities in Texas are also sidestepping the dramatic downturn affecting most other parts of the country, thanks to increasing home values.
In contrast, Baker says the largest metro areas of Florida and California are the most vulnerable to a continued downturn in remodeling activity, based on home sales and price data. Phoenix, Las Vegas and Detroit are also underdogs in a remodeling recovery.
Baker's team has discovered that replacement projects such as window and siding replacement are returning better than more discretionary projects like kitchen remodels. (Editors note: REMODELING Magazine's 2007 Cost vs. Value Report ranked fiber cement siding replacement as the #1 home improvement project for return on investment, generating a nationwide average return of 88.1%.)
2008: A Day in the Life of a Remodeler
Lenny Rutherford, Chairman of NAHB Remodelers and President of Legacy Construction, Farmington, New Mexico says he is witnessing firsthand the tightening of lending standards for even "gold-plated" clients. The contractor also says clients are taking longer to sign contracts, and that higher end jobs are diminishing. On the bright side, he says green remodeling and aging-in-place projects are becoming more prominent.
Long-Term Outlook is Excellent
After stabilization and modest increases in 2009, the long-term prognosis for remodeling activity is excellent. "It's no question that the remodeling market over the longer-term is a terrific thing to be in," according to NAHB's Seiders. "The housing stock is growing all the time" and homes continue to grow older. He expects that by 2012, remodeling activity in the United States will match the high mark set in 2006, and the sector will reach "new records by 2013."
Best of all, since the experts agree that remodeling follows the same cycle as housing, recovery for both sectors might just be around the corner.
We'll side with that forecast.
Seiders offered his insights as part of a remodeling activity teleconference presented earlier this quarter. The panel also included Kermit Baker, Senior Research Fellow and Director of Remodeling Futures Project, Harvard University's Joint Center for Housing Studies and Lonny Rutherford, CGR, CAPS, Chairman of NAHB Remodelers and President of Legacy Construction, Farmington, New Mexico.
NAHB's Seiders said the biggest declines have been in the "home improvement" category, which are defined as additions and alterations. He predicts that this category will fall eleven percent for the year. "We do find that the most cyclical-sensitive, or volatile component of the remodeling market is improvements to owner-occupied housing—particularly big jobs," the economist explained. This segment is "about as cyclical, believe it or not, as the new home market itself."
On the other hand, "home maintenance and repair" projects, will actually register increases this year, Seiders believes. In fact, he predicts that maintenance and repair activity will lead the way in a turnaround for remodeling as a whole in 2009. Furthermore, repair of renter-occupied units will see the greatest activity, as homeownership falls and rental occupancy rates rise.
What to Watch for in Remodeling Recovery
Kermit Baker of Harvard University's Joint Center for Housing Studies, said that one of the best tools to predict remodeling activity is to closely monitor existing home sales for a region. Existing home sales act as a leading indicator for remodeling activity by about six to nine months, according to Baker. When an existing home is sold, a buzz of activity takes place on both sides of the transaction. "The seller usually does some work preparing the home for sale," he explained, "and the buyer usually does a fair amount of work to customize that home after they've purchased it." In fact, his research generally shows that "a typical home buyer will spend about twice as much on remodeling as a non-home buyer."
Home price increases and declines also help him create remodeling forecasts. Declining home values, for instance, offer "less incentive for homeowners to undertake home improvement projects," Baker said. "They're getting less return on their investment," so a lot of households wait for prices to hit bottom before undertaking some of the larger projects.
Remodeling Activity Expected to Show Improvement Starting in 2009
Industrial Midwest Poised to Fare The Best
Based on sales and pricing data around the country, Baker sees a surprising contender for a recovery in remodeling activity: the industrial Midwest. The analyst believes cities such as Indianapolis, Columbus, Pittsburgh and Buffalo ("markets that have already taken a bit of a hit," starting as early as 2005, Baker explains) may have already bottomed out and are expected to fare the best this year. Many areas in this region Several cities in Texas are also sidestepping the dramatic downturn affecting most other parts of the country, thanks to increasing home values.
In contrast, Baker says the largest metro areas of Florida and California are the most vulnerable to a continued downturn in remodeling activity, based on home sales and price data. Phoenix, Las Vegas and Detroit are also underdogs in a remodeling recovery.
Baker's team has discovered that replacement projects such as window and siding replacement are returning better than more discretionary projects like kitchen remodels. (Editors note: REMODELING Magazine's 2007 Cost vs. Value Report ranked fiber cement siding replacement as the #1 home improvement project for return on investment, generating a nationwide average return of 88.1%.)
2008: A Day in the Life of a Remodeler
Lenny Rutherford, Chairman of NAHB Remodelers and President of Legacy Construction, Farmington, New Mexico says he is witnessing firsthand the tightening of lending standards for even "gold-plated" clients. The contractor also says clients are taking longer to sign contracts, and that higher end jobs are diminishing. On the bright side, he says green remodeling and aging-in-place projects are becoming more prominent.
Long-Term Outlook is Excellent
After stabilization and modest increases in 2009, the long-term prognosis for remodeling activity is excellent. "It's no question that the remodeling market over the longer-term is a terrific thing to be in," according to NAHB's Seiders. "The housing stock is growing all the time" and homes continue to grow older. He expects that by 2012, remodeling activity in the United States will match the high mark set in 2006, and the sector will reach "new records by 2013."
Best of all, since the experts agree that remodeling follows the same cycle as housing, recovery for both sectors might just be around the corner.
We'll side with that forecast.