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MAY 2008 BEACON Retrofit is It...Isn't It??? New Data From the NAHB & Harvard University Sheds New Light on Remodeling Market <May 7, 2008>In a conference call with media today, the National Association of Home Builders (NAHB) released new data on the state of the residential remodeling market showing a tough 2008 is yet ahead before the business decline bottoms out and begins a new pattern of sustained growth. Given that many feel the residential remodeling market is a key indicator for installers and integrators in the retrofit business, this information may be crucial to many in the custom integration channel.
The conference call featured David Seiders, Chief Economist of the National Association of Home Builders; 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, NM.
Seiders Says Hold On
Seiders started the conference with some general comments about the economy and some specific notes on the housing industry. Noting that the country is “clearly in an economic slowdown” and acknowledging that many consider the economy is in a recession, Seiders went on to say that the housing industry, “has been falling rapidly since the latter half of ’05.” The bottom, Seiders projected will come some time in the middle of 2008, with the business stabilizing in 2009 before embarking on more vigorous growth beyond then.
Seiders informed the press that he has heard it suggested that the remodeling business runs the opposite of the housing market overall. On the contrary Seiders says, NAHB data shows clearly that the two businesses move in the same general pattern with remodeling often lagging the overall housing trend.
Seiders showed new projections and said that the NAHB expects the remodeling business to decline an additional 7% for the balance of 2008 for a total year-over-year decline of 11%. 2009 is expected to show stability with perhaps some small growth.
Long term, Seiders called the remodeling market a “terrific thing to be in” as various fundamentals, such as the growing amount of housing stock, bodes well for a bright future in remodeling.
See slide, “NAHB Remodeling Market Index”
However, in discussing a slide titled “NAHB Remodeling Market Index”, which showed the results of a continuing survey of remodelers by the NAHB…even Seiders had to admit that, while the “Current Conditions” showed that remodelers saw stability in the first quarter of 2008…the “Future Expectations” number showed that remodelers were expecting further downside in future quarters of 2008.
According to the NAHB the RMI, “measures remodeler perceptions of market  demand for current and future residential remodeling projects. Any number over 50 indicates that the majority of remodelers view the market conditions as improving. The RMI has been running below 50 since the final quarter of 2005.”
Harvard Shows Geographic Breakdown
Harvard University’s Kermit Baker, discussed the remodeling market with a particular focus on the geographic impact of the housing market decline.
Baker noted that home sellers remodel homes for the purpose of the sale, and home buyers remodel homes they’ve purchased to customize it…clearly, he suggested, what happens in the housing market will directly impact remodeling.
Harvard’s Joint Center for Housing Studies (JCHS) has found a specific correlation between two key variables in determining accurate forecasts for regional results in the remodeling market. These two variables are housing prices and housing sales.
In the case of the variable “sales of existing homes,” Baker suggested that these sales have a direct impact on the opportunity for remodeling. In the case of the variable “home prices” this has a direct impact on buyers’ willingness to remodel.
The JCHS looked at the top fifty U.S. metro markets to determine the impact of these variables and to find the markets most and least likely to have their remodeling businesses impacted by the current housing market declines.
See the slide, “Markets Least Vulnerable to a Remodeling Downturn…”
This slide shows the top ten remodeling markets and plots the two variables…red circles for those markets with the largest gain in prices, and the blue squares showing the markets with the smallest drop in sales. These markets are the best markets in the country for the remodeling business overall and should continue to be resilient to future pressures.
It is interesting to note that, other than the Pacific Northwest and Texas, most of these markets are in the Northeast and Upper Midwest. Two specific markets – Pittsburgh, PA and Austin, TX – get a double boost of good fortune as they did well in both variables.
See the slide, “Markets Most Vulnerable to a Remodeling Downturn…”
There is a flip side to every coin, and this chart shows the bottom ten metro markets for remodeling. These markets plot the two variables from the opposite view…red dots indicating those markets with the largest drop in prices and blue squares showing those markets with the largest drop in home sales.
Again, it is interesting to see the regional impact. According to Baker, for the most part, these markets were overbuilt and got overheated during the housing market boom prior to 2006. California and Florida are hit hard as are selected metros such as Phoenix, Las Vegas and Detroit – which Baker specifically mentioned as in a long term decline. 
Three metros in California (Sacramento, Riverside, and San Diego) and three metros in Florida (Orlando, Tampa, and Miami)…in addition to Las Vegas, Nevada…get a double whammy with significant declines in housing sales and prices.
See slide, “Percentage of Cost Recouped on Remodeling Projects…”
Finally, Baker noted another factor that the JCHS feels may be acting as a drag on the remodeling industry – the declining amount of remodeling investment that is ultimately recouped by the homeowner. In a survey that is conducted by Remodeling Magazine and the National Association of Realtors, homeowners have experienced a declining return from their remodeling investment over the last five years of the survey.
See slide, “Mid-Range Improvements and Replacements…”
In addition to this, Baker noted that data indicates that homeowners get a better return on more mid-range improvements as compared to upscale ones. Five years ago, Baker noted, this trend was reversed as homeowners generally fared better with upscale home improvements. The current trend suggests homeowners are more likely to engage in smaller, lower cost projects to gain a better return.
Remodeler Rutherford Notes Specific Remodeling Trends
Finally, Lonny Rutherford, Chairman of NAHB Remodelers and the President of Legacy Construction in Farmington, NM said that one of the key remodeling trends he sees includes “green” remodeling programs to improve residential energy efficiency.
Echoing comments from Seiders and Baker, Rutherford noted that most remodelers are reporting smaller jobs and less fill in the “pipeline” of future work. Remodelers, he says, are forced to reconsider their “business model” to deal with this trend.
Other trends include “aging in place” projects in which homes are remodeled to make the home better and safer as owners age…such as replacing stairs with ramps, for example.
In closing the session and in a Q & A session both Seiders and Baker took pains to assure journalists that the remodeling market has a very bright future. Seiders called the long term prospects for remodeling “excellent” and went on to forecast that the business will return to record territory (which was back in 2006) by 2012 or 2013. Remodeling, Seiders said, is poised to outperform the overall economy for several years after 2009.
Baker, equally sanguine, said that there will be “good, healthy growth in remodeling going forward over the next seven or eight years.” Charts are copyright 2008 NAHB and Harvard University |
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