Looking Good

by kbetz@solagroup.com

Remodelers are an optimistic group by nature. How else can they routinely pull apart someone’s home and expect to put it back together better than before?

So it should come as no surprise when asked about the remodeling market for 2013, they’re enthusiastic. Fifty percent of respondents to a recent Qualified Remodeler survey predict a good year, and 11 percent proclaim it will be excellent. Even those less positive (32 percent) say it will at least be fair. Only 6 percent anticipate a poor year.

Virtually all the indicators, whether they are specific to remodeling, new residential construction, real estate or the economy in general, support this show of confidence — with the inevitable caveats, of course.

In October 2012, the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University suggested a robust recovery of the remodeling market with double digit growth in the first half of 2013. (The next LIRA report will be released on January 17.)

Forecast on Track

Kermit Baker, director of the Remodeling Futures Program at the Joint Center, says the forecast seems to be on track, noting that third-quarter data for 2012 is coming in stronger than projected. Originally, the LIRA anticipated a reasonably weak third quarter but “the trajectory seems to be even a bit stronger than we thought it was going to be,” he says.

A significant factor driving the remodeling recovery, Baker says, is a strong recovery in the broader housing market. “Housing starts and new home sales are coming off an incredibly weak base, but we’re seeing strong growth. We’ll probably see close to a 25 percent increase in housing starts in 2012, when we get the numbers in, and the consensus is for another 25 percent in 2013. That will take us up to a million starts or so. I think, and most others feel, once our economy is back to normal it can support 1.5 to 1.7 million starts. We’re still well below where we think we’ll be in a few years, but those are good solid numbers.”

With a strengthening housing market, home prices start to increase and the mobility of homeowners rises as well. “Mobility is very important for home improvement activity; that’s the most common time [when homeowners move into a new house]for undertaking a project,” Baker explains.

“You start to get a general confidence returning and a feeling that things are going to go OK; that encourages people to reinvest in their homes. With the increase in house prices we start to see fewer homeowners who are underwater with their mortgages, and more households potentially are able to borrow against equity to fund home improvement projects.”

Financing, Financing, Financing

Financing, of course, is perhaps the biggest problem the remodeling industry is facing now. Baker points to a quarterly survey of bank lending officers by the Federal Reserve Board. The survey specifically asked about home equity lines of credit, and in the third quarter most respondents were still modestly tightening their criteria for lines of credit or keeping the criteria basically unchanged. Overall, more were tightening than easing criteria.

The flip side of that question is that demand for home equity loans was strengthening, but not by a lot. Nevertheless, “the bottom line is people were looking to borrow more, and banks were still willing to lend less,” Baker says.

“There are some good rates out there,” he says, “but it’s not clear how much money is available. I think banks are still very nervous about lending, and there are still a lot of hoops to jump through if [a homeowner] wants to take out a home equity loan. [Banks] are very cautious about appraisals and what share of the value of the home [homeowners] can borrow against.”

Remodelers, in conversations with QR, have noted an increase in projects that are self-funded by homeowners. “That’s always been true,” Baker says. Remodeling is an industry “that for some reason doesn’t rely on a lot of financing or a surprising low share, but the share that has used financing has been going down in recent years, and the number-one reason is banks are hesitant to lend. Secondly, homeowners are hesitant to borrow. A lot of folks don’t want to put their house at risk by borrowing against the equity and risking another downturn after all of the foreclosures they’ve heard about,” he says.

Cash on the Barrelhead

As a result, Baker explains, more and more homeowners are saving to pay cash for home improvement, and it makes them more price sensitive. When projects were financed by a home equity loan, upselling might mean an extra incremental payment of $50 a month, but with cash it could add an extra $2,000 or $3,000 to the bottom line immediately.  “I think owners are just unwilling or unable to go that distance now,” Baker says. “The [homeowner’s] budget is pretty firm, and [remodelers] had better figure out a way to come in within that budget if they want to get the job.”

Although financing remains an obstacle to recovery, other factors that broadly affect the U.S. economy could put a stick in the spokes of recovery, too. As of this writing, the much talked-about “fiscal cliff,” and the possibility of negative growth numbers if that cliff is not circumvented, still looms as a worrying scenario. “That could be a very, very serious problem in terms of continuation of the trends that we have been seeing,” Baker says.

 “The recovery of the housing market,” Baker continues, “is predicated on things getting somewhat better in the broader economy. I don’t think we need to have an unemployment rate of 5 percent; I don’t think we need to add 250,000 jobs a month; and we don’t need GDP growth of 4 to 5 percent to keep [the current trend] going — but we need all of those to be at least preceded by a plus sign rather than a negative sign.”

An economic reversal would bring back some of the problems we thought we had made progress in resolving, such as the number of distressed properties, Baker notes. “If those [numbers of distressed properties] start to climb again, it would start to depress house prices; we’d start cycling back down, and that would start limiting mobility.”

Distressed Opportunities

Distressed properties, incidentally, represent a significant potential for remodelers. “We’ve estimated that close to $10,000 a unit is spent on repairs and improvements to get those homes back in the housing inventory,” Baker says, adding that in 2011 an estimated $10 billion was spent nationally renovating distressed properties.

Another bump in the road to recovery may have to do with labor availability as growth in home building and improvement continues. “I do think that we’re likely to run into some labor issues fairly soon—and probably earlier than we might have expected. A lot of remodeling contractors went out of business during the downturn, but I think what happened is a lot of custom builders backfilled into the remodeling market. It didn’t look like a labor shortage in any sense because we had those builders going after some of the upper-end remodeling projects. But I think they will go back to new home building [as the market improves] because a lot of their competition went out of business. It’s going to be easier pickings for them back on the home builder side.”

Younger people, Baker says, don’t see remodeling as a desirable career path at least in part because of the cyclicality of the construction industry that routinely leads to periodic unemployment as the economy goes through normal recessions. “I think it could be a problem trying to rebuild this labor force,” he says.

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