Market Memo

ONEKAMA, Mich. — Normally, summer is a time when this part of northern Michigan hums with the activity of vacationers. This year, however, things are just a step slower. For Sale signs dot the lawns of many homes along these beautiful lakes. Many homes for sale look brand new. And they are.

There is no mystery to this malaise Michigan. The job losses in the auto industry and the pharmaceutical industry have hit the state very hard over the last 12 months and many people have put their vacation home up for sale as a result. The timing could not be worse. Sellers are encountering a very slow market and prices have come down quite a bit.

All of this is a shorthand for what is happening now in the remodeling market. Nationally the market is growing, but at a much slower pace than in the immediate past. This year remodeling is expected to grow at a 2% rate, versus almost 20% in 2005.

On Aug. 17, 2007, The University of Michigan released its latest quarterly assessment of consumer sentiment and at 83.3 it was at its lowest level in a year. In addition to dips in home-price appreciation, there has also been a general nervousness on Wall Street which has led to tighter credit markets and a flight from U.S. stocks.

Despite an aggregate level of $10 trillion in home equity around the country, the nation’s homeowners are have gone from feeling bullish to feeling gun-shy. Just a couple of years ago homeowners felt flush as the price of their homes — on paper — grew at a nice pace.  With home-price appreciation at 10% to 15% per year, it is a lot easier to spend savings on home improvement, or even to borrow to make home improvements. But now, all of those For Sale signs, in a very real way, have taken a little bit of the wind out of their sales. People are spending much more cautiously.

Some remodelers are even reporting that deals that would normally close quickly have taken longer to get done. Others say, customers have scaled back their plans. 

In any event, the fundamentals of the economy remain strong, and the underlying strength of the remodeling market — with all of the pent-up demand for housing rising — are reasons not to worry about the long term in remodeling. It is good. The real question is what, when, and how this deflated level of consumer confidence will re-inflate and float the remodeling market to higher levels.

My thought is that it won’t take much. It was very good news to remodelers that the Fed this week lowered its Discount Rate to banks by half a percentage point. It shows that current Fed Chairman Ben Bernanke is not about to sit idly by. He is willing to take action to provide a positive spark when needed.

The remodeling market is going to be fine. It won’t take much of a spark to get it’s growth rate back on track.