Constructive Signs Up Ahead

by WOHe

Constructive Signs Up Ahead

A year of national tragedy, dot.com disasters and stock market
turbulence spawns a surprisingly optimistic economic forecast for
2002. 

By Daina Darzin Manning


September’s tragic events seemed like the death knell for an
economy already racked by a stock market on a roller coaster ride
of wildly fluctuating prices not to mention a rapidly imploding
e-commerce market. And, in fact, the first three weeks after the
terrorist attacks bore out the promise of a grim future.

“Without a doubt, September 11 and, to some degree, the anthrax
scare, put the brakes on a lot of new construction, and has
affected the [kitchen and bath] remodeling market,” states Tim
Aylor, construction economist for the Raleigh, NC-based FMI,
management consultants to the construction sector. “The interest in
new construction residential dropped dramatically in September. The
week or two after the [terrorist attack], people almost didn’t want
to go out of their doors. You saw less traffic through houses, and
fewer offers being made despite almost record affordability.”

“Our surveys of builders and remodelers show that there were
some negative effects [because of 9/11],” confirms David Seiders,
chief economist for the National Association of Home Builders, in
Washington DC. “We’re getting some inkling of an increase in the
cancellation rate. Some of the builders are becoming quite cautious
about their speculative building and extending options on land
contracts.”

“It’s still not clear what the impact will be,” adds Kermit
Baker, director of the remodeling futures program for the Joint
Center For Housing Studies, in Cambridge, MA. “It’s negative, but
how negative is still up in the air. Most remodelers are saying
they’re not seeing a dramatic impact on their workloads.” 

While a host of projects already in progress seem to be
cushioning the kitchen and bath industry from the worst of the
impact, some report new orders are slowing a bit. “Some contractors
were carrying 4-6 months of backlog,” Baker notes. “[Clients]
aren’t canceling their projects [if] they had the financing
together.” However, he adds, “We had a horrendous employment report
for October. People are pretty nervous about the underlying
condition of the economy and that’s not generally the time for
discretionary expenditures like remodeling.” 

Some believe this is particu-larly true in regions hard hit by
the failure of many dot.coms, such as the Silicon Valley, San
Francisco and Boston, as well as in states dependent on tourism as
a primary source of income. Airport hub cities such as Dallas/ Ft.
Worth may also also suffer economically because of the downturn in
airline travel, while the Midwest faces challenges due to lost
manufacturing jobs. 

But Kevin McNulty, executive v.p. and COO of the National
Association of the Remodeling Industry (NARI), in Des Plaines, IL,
insists, “Some of my busiest remodelers are in the Silicon Valley
area. Americans are [still] spending.” 

And Lawrence Yun, senior forecast economist for the National
Association of Realtors, in Washington, DC, points out, “Overall,
the housing sector has kept the economy from dipping into a
recession prior to September 11. Post-September 11, it will again
be the housing sector providing a buffer zone from sinking
deeper.”

A Shallow Recession


Considering the challenges of today’s economic climate, economists
are surprisingly optimistic about the future of the housing and
remodeling markets.

“The unanimous [opinion] seems to be, [this is] a recession of
relatively short and shallow duration,” notes Dick Titus, executive
v.p. of the Kitchen Cabinet Manufacturers Association, in Reston,
VA. While he forecasts a downturn in late 2001, he believes things
will start to pick back up during the first or second quarter of
2002, “[with] no significant improvement until 2003. We anticipate
a flat year coming up.”

“[The economy] hasn’t fallen anywhere near the level of previous
recessions,” points out Seiders. “The numbers look more like the
mid-’90s, when the Fed had been tightening, and housing lost some
ground on a temporary basis.” He adds, “We did some trimming to our
forecast compared to our pre-attack forecast. We trimmed economic
growth numbers and jacked up our expectation of unemployment. We
trimmed our estimates of housing starts and remodeling activity
through the fourth quarter/first quarter and into the second. And
then [we] installed quite a spirited comeback the latter part of
[2002] and 2003.”

“We anticipate the current recession to be one of the mildest in
history, with economic rebound by spring 2002,” declares Yun. He
adds that U.S. successes in the Afghan war, as well as record auto
sales due to 0% financing, were already positively impacting the
economy in fourth quarter 2001. 

McNulty points out another motivator: “There’s such a push by
national leaders to go out and spend it was [presented] as a
patriotic gesture.” 

“You hear a lot of different forecasts, but the consensus is
that the recession began in the beginning of the fourth quarter and
it’s likely to be a two-to-three-quarter recession,” says Baker.
“We could see some better numbers by late spring.” 

But, he warns: “I don’t think we should be writing off this
recession yet, since we don’t know what its core characteristics
are. And the thing that prompted it the terrorist attack could well
reappear. It’s premature to be writing about our revival until we
see how the current situation will stabilize out.” 

Baker also points out, “We were heading into recession
independently of [September 11].” 

Agrees Aylor, “Consumer confidence was edging downward from the
first quarter of [2001], because of the stock market and
recessionary conditions in some sectors of the economy
manufacturing, the service sector, financial, telecommunications.
These were all slowing down and layoffs were hurting consumer
confidence even before [9/11].” 

Low Interest Rates

Low interest rates are uniformly cited as the reason why the
housing and remodeling markets are in far less trouble than they
might have been. 

“Mortgage rates are at their historic lows,” declares Yun. “And
when the mortgage rate goes down, it qualifies new potential
homebuyers who couldn’t [afford home ownership] before. You’re
enlarging the pool of eligible buyers.”

Yun predicts that the low-end market will avoid the impact of
the recession better than the high end, which was hurt by the
turbulent stock market. “[2001] was a really sharp stock market
correction, so a lot of people have lost wealth,” Yun
elaborates.

Seider agrees: “A lot of people on the high end lost equity in
the stock market,” he notes. “The upper end of the trade-up market
seems to have taken a pretty serious hit.” 

Adds Aylor, “At some point, people don’t want to take the money
necessary for a down payment out of their stock portfolios if
they’re going to incur a loss. So, you’re seeing a topping out of
the upper-end market.” 

But, on the lower end, economists note that twenty-something
dot.comers seem to have re-bounded from their industry’s collapse,
and are still buying condos and starter homes.

Overall, economists agree that the housing market isn’t as hard
hit as some parts of the marketplace, such as the manufacturing
sector. 

“The new housing and remodeling outlook is not gloomy,” insists
Titus. “We’re seeing a downturn, but housing has done relatively
well in this current economic condition. There has been a lot of
demand, and remodeling has been strong.” 

Seiders believes that there has been somewhat of a pull back in
the remodeling market, but, “on the positive side, the one thing
we’ve gotten out of this mess is even lower interest rate structure
than we had.” He also points out the positive investment aspects of
home ownership as a plus for the future of housing and remodeling.
“The condition of the stock market, the major uncertainty created
by the war it does seem like people [have] a hearth-and-home
feeling about things,” he observes.

Several economists mentioned the “cocooning” effect as a
positive force for the housing market that, ironically, September
11 might have intensified. These days, fear of air travel is
causing people to cancel travel plans and perhaps use that money to
improve their home. “September 11 is going to continue to reinforce
the cocooning effect,” believes Titus.

Low interest rates help the remodeling market as well, with
second mortgages and consolidation loans wherein the remodeling
loan is also used to pay off credit card debt, frequently resulting
in a lower monthly payment overall popular options. “[That’s]
clearly a driver,” says McNulty. “The interest rates are fueling
additional participants in the remodeling market.”

Do lower housing starts also mean more remodeling jobs, as
consumers decide not to buy a new house, but fix up the one they
have instead? Economists say no.

“There’s always been this notion of remodeling as being this
balance wheel when new home construction eases, but history tells
us the two have moved in tandem,” says Baker. “[And], there’s
always a third choice, which is to do nothing. When economic times
are uncertain and people are nervous about their outlook, doing
nothing is what they gravitate toward.”

Overall, it boils down to consumer confidence, economists agree.
“When confidence levels drop, despite affordability, you have
people holding off on decisions,” says Aylor. 

Consumer confidence is tied up to September 11 and the anthrax
scare, Titus believes, but “the way things are continuing to
unfold, consumer confidence is returning.” 

Don’t Do It Yourself
A year ago, if you
asked remodeling professionals what their biggest problem was, the
answer was “difficulty finding, training and keeping good workers.”
Ironically, this challenge has worked to remodelers’ advantage
during this period of economic uncertainty. These days, remodelers
are staying busy because previously, there was too much work to go
around. 

“The demand for remodeling work is clearly outstripping supply
in some areas,” notes McNulty. “Our [remodelers] could take on a
lot more work if they had the [employees] to do it.” He points out
that his organization is making efforts to get more workers into
the remodeling trades, such as offering a certification program on
a high school level as well as Spanish language versions of the
organization’s materials to accommodate a rapidly growing portion
of the remodeling work force. 

Titus adds that the failure of many dot.coms may contribute to a
resurgence in people wanting to go into the skilled trades. “A lot
of younger people were attracted to high tech, and now that’s lost
some of its charm,” he notes. “Stability is becoming more
important.” 

Part of the optimism economists feel for the next year stems
from the fact that, for a lot of consumers, 2002 is the year they
have to get their roof replaced. Several economists point out that
a significant number of baby boomer homes are coming up for
non-discretionary home repair, and McNulty adds that, often, an
optional remodeling item will get included in the job.

Aylor notes that this phenomenon is particularly prevalent in
the Southeast, Southwest, the Sun Belt and the Mountain states, all
of which enjoyed a population migration in the ’60s and
’70s. 

“Many of the systems within a home plumbing, kitchens typically
have a lifespan of 25 to 35 years,” McNulty explains. “A lot of
these [homes] have to be [remodeled]. That’s the driver for our
optimism for the next few years.”

Baby boomer clients are also likely to call a professional
remodeler rather than do it themselves. “The baby boomers are older
and have more disposable income,” explains McNulty. “If they have
to redo their kitchen, they’re going, ‘eh, let’s hire somebody.’

“[Baby boomers’] income is growing and their desire to get on
the roof to nail those shingles is diminishing,” quips Baker. He
adds that projects that add quality to a home also don’t lend
themselves to the do-it-yourselfer: “If you’re paying a lot of
money for granite countertops, you’re not going to risk screwing it
up by doing it yourself.”

Though the growth of professionally installed projects is
significant, it’s a different arrangement from the past, when a
designer or general contractor came in and took care of everything.
Frequently, consumers are turning to the “buy it yourself” plan,
where a customer will buy a product from Home Expo and hire the
store’s staff to install it. 

“It’s certainly something that the big boxes have a strong
interest in,” says McNulty. “They have figured out that they make
more money on the sale of service than the sale of materials.
They’re moving into the remodeling area, [but] they need to find
installers. They don’t have that labor force, so they’re building
[alliances] with remodelers.”

Adds Yun, “Home Depot had a very good profit in the recent
quarter. People are investing in their homes, not only as a
shelter, but as an investment. With the tanking of the stock
market, people may be putting more money into upgrading their
home.” 

Aylor also credits bargain prices for building materials as a
part of big box success. “We see very brisk sales,” he
says. 

But Titus adds that consumers have grown more cautious: “Things
will be a little more conservative, a little more guarded,” he
believes, anticipating people will choose more practical,
“meat-and-potatoes” products over edgy, trendy ones. 

He adds that, when it comes to cabinetry, “there’s been some
slow down in the custom end, but still, most of the people I talk
to are enjoying strong years [selling custom cabinets].” 

Seiders points out that activity postponed because of economic
problems tends to come back into the market not too far down the
road. “This is what makes housing so cyclical,” he explains. “You
get this pent-up demand that’s generated during this slow period.”
He predicts this is part of what will give later 2002 and 2003 its
economic “bang.”

Aylor concludes that even the worst parts of the past year were
not as bad as they could have been. “October retail sales [had the]
biggest rebound ever,” he declares. “So, we think it’s a mistake to
be too pessimistic.”

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