Remodeling Market Memo

A few days into the mandatory energy audit scheme put in place by the Austin, Texas city council and already there is negative press about the new ordinance.

Page three of today’s Wall Street Journal carries a story about how the new law is ”vexing” the city’s homeowners. Some complain that disclosures will dampen home-sale prices. Others quoted in the story resent criminalization of non-compliance – the law carries the threat of a misdemeanor charge. And many are simply confused by the new law. They are surprised to learn that an energy audit is not part of the typical home inspection.

Formally known as The Energy Conservation Audit and Disclosure Ordinance, the new law took effect in Austin on June 1. And while it does mandate an energy audit for home sellers, it does not require them to pay for any improvements that may be uncovered. Similar ordinances in San Francisco and Berkeley, Calif. require put a home-improvement onus on the homeowner prior to selling.

According to the Austin Energy web site www.austinenergy.com the ordinance is part of a broader city Climate Protection Plan, which aims to substantially reduce the region’s carbon footprint. The goal is to offset peak demand for electricty by 700 megawatts by the year 2020. This is an admirable goal, but should these constraints be put on homeowners, perhaps to their financial detriment? The answer in most places remains ‘No’. But we can certainly expect that energy audits will become an increasing part of the home selling disclosure process — one way or another. Even if an energy audit is not required, many savvy home buyers are going to ask for one at their expense, or (in this slower home buying market) may require one conducted by the seller prior to closing.

One can also envision a time, in the not too distant future, when home buyers will reward those who have paid for energy performance improvements and pay a premium for homes that score well on energy audits. To a homeowner who puts in new windows, adds insulation, seals their HVAC system, a $300 energy audit will seem like a small price to pay for tests that will ultimately boost their asking price.

Legally required energy audit disclosures are fair. Home sellers already expect to provide past home energy bills to prospective buyers. It makes sense because it brings greater clarity to a free market for homes. It brings more transparency to the home buying process. And in the end, laws like the one that recently took effect in Austin, will help us as a country move toward a more energy independent future.

What do you think about the Austin Energy-Audit Ordiannce? We’d love to get your feedback.

ARLINGTON HEIGHTS, Ill. — April 16, 2008 — When remodelers talk about the need to improve their Web site, their instincts are 100 percent correct. If ever the time was right to work on your Internet strategy, it is now. So much of the traditional ways for generating leads and making your phone ring has become less effective with the rise of the Internet. Let’s face it consumers (your customers) research who to call online before they see people about a remodeling project. If your Web prescense is not a good one, it will hurt you.

 Once you’ve got a good Web site with excellent content and graphics, you’ve got to make sure your page gets properly linked to the Web. There may factors to consider but they boil down to three key areas.

Optimize your Web site. Remodelers are discovering that their most qualified leads come to them via the Internet. Success involves incorporating keywords that drive your target customers to your site. This process is called search engine optimization or SEO.

Sign up for Internet referral services. Advertise online and sign up with a lead-generating company such as Yodle.com, ServiceMagic.com, EveryContractor.com, RenovationExperts.com or Contractors.com. Your phone will not ring, but your computer will ping. Remodelers find that being fastest and first to respond is critical to proper utilization of these leads. Second best is not good enough in this arena, so your team must be set up to jump on local leads as soon as possible.

Use Google AdWords. Use Google AdWords to drive traffic to your Web site and increase your visibility. This can be thought of as the broadcast advertising of the Internet. Whereas search engine optimization tends at its best to drive qualified leads to your site, Google AdWords can give you much greater traffic that needs more qualifying. It will certainly make your phone ring, but it can be expensive.

These days, a good Web site won’t get viewed by very many people unless these three areas are addressed somehow. Use them and you will certainly improve your lead flow.

ARLINGTON HEIGHTS, Ill. — March 17, 2009 — In its efforts to bolster prudent lending practices, the Federal Reserved recently announced upcoming rule changes that would eliminate one of the most popular ways to finance home improvement projects — “same as cash” offers. Under the new rules, “same as cash” offers whereby consumers agree to pay the total amount owed in a given period — 6, 12 or 24 months — for no interest. However, if the loan is paid later than the period, retroactive and high interest rates kick in. The new rules are set to take effect in July of 2010.

 Here’s a story from USA Today that tells more:

Fed changes rules on retailers’ no-interest offers By Jayne O’Donnell, USA TODAY “No interest! No payments for 18 months!” “Two years, same as cash!”Retailers are scrambling to save the deals they love to shout about.A new federal rule is expected to change the promotion and perhaps even the availability of the months-long special offers, which retailers often market for big-ticket items like TVs, furniture and appliances.The rule change, made by the Federal Reserve, does not take effect until July 2010, but some retailers are already modifying terms of their deals so they expire before then, according to the National Retail Federation. At issue is the deferred interest provisions many include — typically in fine print — as part of the “no interest” or “same as cash” deals.Confusion abounds over what the rule change exactly means, and the Federal Reserve is expected to issue a clarification in April. One likely effect: more explicit advertising of the deferred-interest rules, perhaps as prominently as the “No interest!” claims.“Whatever (the Fed’s) intent, it’s unclear enough that a lot of retailers are curtailing these programs because they don’t want to be caught holding the bag,” says NRF spokesman Craig Shearman. “The bottom line is, consumers are being impacted.”Officials from Home Depot, which is advertising a six-month, no-interest loan, declined to comment. Sears spokesman Christian Brathwaite says it is reviewing the rule and is working to meet the Fed’s concerns and “still help meet our customers’ credit needs.” Federal Reserve officials declined to comment.Favorite of furniture retailers The no-interest or deferred-interest loans come in many forms and often draw varied responses from consumers and credit counselors about whether they are a great deal or a way to take advantage of already struggling consumers.The deals can run from a few months to two years or more, and sometimes don’t require regular payments. When minimum payments are required, they may not cover the whole balance by the end of the loan, leaving a lump sum payment due at the end.If the loan is paid by the due date, the interest is waived; sometimes, though, monthly payments must be paid on time as well. If not, the loan converts into one where the consumer owes interest on the outstanding balance — calculated back to the date of the purchase, not the month the payment was missed.That can make a $1,000 television cost $1,500, depending on the terms, for example.Therein lies the controversy.The loans, which are used by many furniture, home improvement, jewelry and appliance stores, were addressed in the sweeping Unfair or Deceptive Acts or Practices act approved in January, which was supposed to clear up confusion about the varying terms of different types of “no interest” or “same as cash” loans. Auto dealers’ loans are not included, because the deals they offer under similar advertisements are not revolving lines of credit, as retailers’ deals are.Anything that eliminated the loans would be “a huge nail in the coffin for furniture retailers, considering that 70% of them offer deferred financing,” says Ray Allegrezza editor in chief of Furniture Today.NRF general counsel Mallory Duncan says some stores estimate about 75% of people pay such loans off on time, but that varies from program to program. Duncan says the people who fail to pay their loan balances by the deadline subsidize those who do.After all, he says, few finance companies would offer loans that didn’t pay any interest.Finance companies that provide the loans already require retailers to pay them a percentage of the purchase price, sometimes as much as 5%. If the rule prohibits deferred-interest charges, as the NRF says it appears to, then Duncan says retailers would have to contribute a much higher percentage of the purchase price. That would make it too costly for them to offer the deals.Works if you’re organized The loans do have their fans.Moxie Karasek of Berwick, Pa., says she’s purchased furniture using the loans, and “it worked perfectly.”“If you have discipline, I say, ‘Go ahead and do it,’ ” she says.Nancy Gleason of Derwood, Md., has taken out no-interest loans for furniture, jewelry and computers.“Whenever I have used these types of payment plans I have always marked the calendar to make sure I pay the amount off prior to the target date,” she says.Even Gerri Detweiler, a credit adviser at Credit.com, says, “If you’re careful, it can be a really good deal.”Detweiler says she financed a large home remodeling project at Home Depot using an interest-free loan and recalls the store clerk warned her the day — and time — the balance was due and that if she missed it she’d be hit with hefty charges.Catherine Williams, vice president of financial literacy for non-profit credit counseling program Money Management International, says eliminating the deals would not be a big loss to consumers, as most already have credit cards they could charge the purchases on.She says the loans can be a boon to those who are “truly budget-minded,” but recommends them only for people who can discipline themselves to “faithfully deposit” the equivalent of monthly payments into their savings account and withdraw it to pay the balance by the deadline.“The reality is, many consumers aren’t like that,” says Williams.Detweiler says she wonders whether most people would take out the loans if the high interest rates that apply after the deadline were more prominently advertised, but people are so “optimistic about their ability to pay” that they still might not pay attention. She also says that those with shaky credit histories must recognize that taking out such loans will affect their credit scores.

“I personally think they are a rip-off,” says Yolanda Hawthorne of Dallas. “I say go without until you can pay cash.”

ARLINGTON HEIGHTS, Ill. — Home price increases were the primary driver of discretionary remodeling spending during the past decade. Now the Federal Government is aiming to keep recent price declines from spiralling further down. To that end, Treasury Secretary Timothy Geihtner announced a sweeping loan modification program aimed at responsible homeowners who are current on their mortgages and have jobs. It is estimated that 1 in 9 home owners will be eligible to receive a lower monthly payment.

Stay tuned to Qualified Remodeler.com today and in the coming weeks as this important housing industry program moves forward.

 Below is a release from the U.S. Department of the Treasury yesterday.

Relief for Responsible Homeowners: Treasury Announces Requirements for the Making Home Affordable Program

On March 4th, The Obama Administration announced new U.S. Department of the Treasury guidelines to enable servicers to begin modifications of eligible mortgages under the Administration’s Homeowner Affordability and Stability Plan – announced by President Barack Obama just two weeks ago. The release of detailed requirements for the “Making Home Affordable” program facilitates implementation of the critical provisions that will help bring relief to responsible homeowners struggling to make their mortgage payments, while preventing neighborhoods and communities from suffering the negative spillover effects of foreclosure such as lower housing prices, increased crime and higher taxes.

Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners, making their mortgages more affordable and helping to prevent the destructive impact of foreclosures on families, communities and the national economy.   

The Home Affordable Refinance program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac.  Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value ratios above 80%.  Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan. 

GSE lenders and servicers already have much of the borrower’s information on file, so documentation requirements are not likely to be burdensome. In addition, in some cases an appraisal will not be necessary.  This flexibility will make the refinance quicker and less costly for both borrowers and lenders.  The Home Affordable Refinance program ends in June 2010. 

The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.  Working with the banking and credit union regulators, the FHA, the VA, the USDA and the Federal Housing Finance Agency, the Treasury Department today announced program guidelines that are expected to become standard industry practice in pursuing affordable and sustainable mortgage modifications.  This program will work in tandem with an expanded and improved Hope for Homeowners program.  

With the information now available, servicers can begin immediately to modify eligible mortgages under the Modification program so that at-risk borrowers can better afford their payments.  

LAS VEGAS — As I walked the aisles of the International Builders Show, I snapped shots of products that caught my attention. They are presented in the order they came out of my BlackBerry camera. Hopefully, they’ll give you a flavor for the show. (Apologies to the public relations people out there who work so hard to send us great photography. But, hey, this is a blog. It is supposed to be edgy. We’ll put the pro shots in the magazine.)

Remodelers have been using Eldorado Stone as exterior products for many years. But over the last few years the company has steadily increased its ideas for interior accent walls. The Gemstone series: VinoWall, ArtWall and CandleWall demonstrate three dramatic but different applications for the company’s various masonry stone veneer products.

CandleWall Display at IBS

ArtWall at the IBS Eldorado Booth

I visited a lot of window manufacturing companies while I was at IBS: Pella, Marvin, Milgard to name a few. There were many new styles and performance grades of windows on display at the show. But I live in an old house, so the one shot I had in my BlackBerry from of a window company exhibit was a Marvin Signature Series casement window that opens inward. It is exactly like the six inward opening casements that were included in the 1912 Craftsman Bungalow I own, only better and a lot more energy efficient.

Vinyl siding manufacturers also featured prominently in my booth visits. I would say that I was struck by the sheer breadth and depth of colors and styles. StyleCrest, I think, went the furthest demonstrate the range to which viny siding can be taken by dislplaying a log-cabin panel, as well as a camouflage version.

Camouflage Viny Siding from StyleCrest

Log Cabin Siding

James Hardie’s fiber cement offerings have grown as well. While visiting their booth, I snapped a shot of their new Reveal product, shown next to their Artisan Lap.

Deck safety is a huge issue in the U.S. Simpson Strong-Tie continues to center its new product offerings around innovations in this area. I held a new, single-piece device that strengthens the connection between railings and the actual deck joists. This helps deck builders and remodelers avoid simply connecting railings to the boards that cover the joists at great long-term peril to deck users.

I spent a good deal of time understanding two new drills from Festool. This company conducts years of R&D and field testing before any new product is released. Here are two new drills that will be released this spring. I asked Festool’s Rick Bush in an e-mail to sum up the benefits of the new drills in one sentence. His response:

I’ll pack this sentence… 

The Festool T drills represent the best technologies (Lithium, Brushless motor, Electronic controls) coupled with maximum versatility with the FastFix chuck system for a tool that does as much as 5 tools in a long lasting, lightweight, and powerful package.

 There you have it. 

Lastly, here is one of several shots that show the side of Vegas that I did not come to see, but experienced nonetheless. This was the scene at the NAHB’s Sales and Marketing Council’s “Nationals” award banquet. This event recognizes those NAHB members who had marketed and sold the most new-construction homes. After thriving in a very tough fourth quarter of 2008, these folks had every right to celebrate.

LAS VEGAS - Everyone is engaged in remodeling activity: even production builders who not long ago would not sniff such projects. Consider the anonymous tip from a Texas remodeler who heard from a VP at a very large production home builder, that his company plans to go back and offer bonus-room buildouts to past new-home customers - not a bad idea actually.

Builders are referring to their move into remodeling as “diversification”, with a heavy emphasis on diverse. Wise builders who are considering a move into remodeling took advantage of the remodeling sessions offered at IBS in droves. Builders typically don’t need to earn the same margins that remodelers do in order to make a profit. Bringing a builder pricing model to the remodeling market — particularly a competitive remodeling market — could be disasatrous. A 25 percent mark-up might be enough to earn a builder the job, but certainly not enough to keep him or her from losing money in remodeling.

On Wednesday afternoon, Jan. 21, NAHBR Remodeler of the Year, Jeff Hunt, of Brothers Strong Inc., in Houston offered his 10 Best Practices seminar. The room was bursting at the seams with builders interested in diversifying. Hunt’s stance toward the influx of new competition: “Bring it on” — not int he cocky I-can-beat-anyone sense, but rather from the perspective of the quality of the industry at large.

Hunt’s logic: The more that sophisticated players are attracted to remodeling, the better the chance for the industry to improve its image with consumers. A second benefit of new construction professionals coming into remodeling, says Hunt, is that true business professionals will understand the need to charge the right price for remodeling services. Conversely, under-bidding can really disrupt a market and make it unprofitable.

Click at right (roy09.pdf) if you are interested in downloading a PDF file of Jeff Hunt’s presentation at IBS.

ARLINGTON HEIGHTS, Ill. — Jan. 15, 2009 — Over the past several weeks of unprecedented turmoil in world financial markets, consumers have stopped spending. Remodelers are finishing their contracted business, but backlogs are shrinking. It is into the teeth of this generalized downturn that a list of the Top 10 Reasons to be Optimistic About Remodeling is now offered by QR.

No. 10 — There are 128 million existing homes in the U.S. That is a huge base of ready business for remodelers and home-improvement professionals.

No. 9 — The average age of the U.S. home is 32 years — prime remodeling age, and a time when major systems need repair or replacement.

No. 8 — Housing activity is likely to increase now that many agree we are at — or very near — historically  bottom levels of existing-home sales.

No. 7 — Mortage interest rates are falling. Conforming 30-year rates are at 60 year lows.

No. 6 — The size of conforming mortgage loans is likely to increase from $470,000 to over $700,000 in the coming weeks. This will allow lenders to sell these larger notes back to the government GSAs — Fannie Mae and Freddie Mac — and thus the millions of homeowners with very large mortgages of up to $700,000-plus will be able to take advantage of the new, lower rates available to conforming loans.

No. 5 — The incoming Obama administration is aiming to weatherize one million homes in the U.S. through a Department of Energy  home-improvement program.

No. 4 — The pending government “stimulus package” is likely to also include several billion dollars for home energy retrofits. If enacted in its draft form, these funds would compensate home owners based on the percentage of energy reduction they achieved in improving their home.

No. 3 — Remodeling activity is a very local phenomenon. Therefore, relatively healthy local economies in Houston, North Carolina, the Pacific Northwest and surprisingly parts of the upper Midwest offer opportunities for new discretionary remodeling in those locations.

No. 2 — A new report based on the most recent American Housing Survey will show that the remodeling market grew unexpectly fast in 2006 and 2007. Remodeling was projected to hit $300 billion by the end of 2007, the new report will show that the market actually hit $327 billion. Things have undoubtedly slowed since then, but, hey, there is more to give back.

No. 1 — DEMOGRAPHICS. There is evidence that many hundreds of thousands of Baby Boomers are moving on with their lives despite the downturn in the economy. Yes, their portfolios have been hit hard, but these 50 to 60-somethings are arguably the most well-heeled cohort of the entire nation. They will continue to move forward update and improve as they move toward retirement. In addition, LEGAL MIGRANTS to the U.S. was pacing at 1 million per year from 1993 until the middle of the decade. These are typically well-educated people with jobs who quickly for housholds. This placed enormous demand on rental and owner-occupied housing markets.

 BONUS: No. 11 — Rents are on the rise, and multi-family property owners are spending on improvements like never before.

BONUS: No. 12 — Drafts of the “Stimulus Package” included billions in funding for improvements to local government buildings and schools — Many remodeling firms do this type of commercial and institutional work.

BONUS: No. 13 — With the slowdown in the housing market, people are more likely to keep their existing home and maintain it rather than buy a new home.

ARLINGTON HEIGHTS, Ill. — Dec. 15, 2008 — As the president-elect Barack Obama today introduces his energy team, discussions about the new administration’s proposed stimulus package have begun to take shape. Beyond substantial funding for infrastructure projects, there is also talk of greater funding for rebates and low-interest loans for home-enegy retrofits.

According to Larry Zarker, president of the Building Performance Institute, officials with the Environmental Protection Agency, the Department of Energy as well as various independent agencies like the Alliance to Save Energy are working with congressional leaders to ensure that the huge stimulus package broadly outlined by the president-elect includes elements that will go toward home renovation.

One source told QR’s Market Memo that there are proposals on the table that would provide as much as $4 billion for these programs. No timetable for a final package has been set forth, but there has been some speculation that Congressional leaders hope to have the overall stimulus bill ready for the new president to sign when he takes office on Jan. 20.

ARLINGTON HEIGHTS, Ill. — Dec. 12, 2008 — Released yesterday in an arcane Federal Reserver report were numbers indicating that the Amercians reduced their level of household debt during the 3rd quarter. Most remarkable is that it appears that this is the first time in 50 years that this has happenend, reports the housing Web site AHN.

The Fed’s “Flow of Funds Report” for the Q3 showed an annualized drop of .08 percent in U.S. household debt. The good news: Americans are getting their financial house in order rapidly. The bad news: there is still a very long way to go before Americans can compare favorably with the savings rates experienced by other leading Western industrialized nations.

Economists who worry about the U.S. heading into a Japan-style quagmire that began in 1991, will see evidence that the U.S. is heading down the same road. And that is a rocky road indeed. Japan’s consumers only recently began spending their money again. While it is way too early to tell if this situation lies ahead for us, reducing debt is certainly needed and, in the long run, good for the economy, the housing market and remodeling activity.

ARLINGTON HEIGHTS, Ill. — Dec. 5, 2008. The news from the economic front has been so relentlessly negative over the past six weeks that even the most pessimistic among us begins to wonder if this “recession/depression” has been oversold. This is not to say that we don’t all face some very real shortfalls in leads and business this year, but at some point, you wonder if this might be a negative bubble.

There is at least one piece of EXTREMELY positive news  coming out of Washington from the same officials that are managing the $700 billion TARP fund. There is a proposal to offer lower mortgage rates to the tune of 4.5% on all NEW purchases of homes. This could do a lot to release pent-up demand. One estimate is that as many as 1.5 million to 2.0 million residential transactions could be stimulated by such a move.

 Here’s why I love this idea and why most remodelers should love the idea too.

1. The primary driver of remodeling activity is existing-home sales. The number is estimated to drop to 4 million units for 2008. Think of what existing-home sales would do if the 4.5% mortgage program hit the streets in January or February next year. Given the previous estimates it is not out of the question to see existing-home sales bump back up to 5 or 6 million — a level that drove some of the go-go remodeling years of ‘04, ‘05 and ‘06.

2. It helps reduce the backlog of unsold homes, which now stands at an 18 month supply.

3. It would shock consumers back off the sidelines.

4. It would allow people who are in danger of losing their homes to find a more affordable way to house their family.

5. It puts the government remedy for this financial crisis where it all started, the housing industry.

Let’ me know what you folks think. Please leave a comment on the blog.

Also, I want to thank all of you who have joined the Qualified Remodeler Magazine group on LinkedIn. We’ll be using it to send out the latest relevant information about the remodeling market that have. This will often come on a daily basis. To join our LinkedIn group click on the preceding phrase or go to http://www.linkedin.com/e/vgh/1428097/.

That is all for now. Feel free to contact me directly at patrick.otoole@cygnusb2b.com.