2010: Heading for Recovery

Despite continued weakness in the overall U.S. economy, there is a growing sense among remodelers that 2010 will be a better year than 2009. In Qualified Remodeler’s annual survey of remodelers, 49 percent said they expect their business to grow by at least 5 percent in the coming year with fully two-thirds of respondents (66.2 percent) saying they expect revenues to be flat or better.

Perhaps most telling has been the increase in the percentage of remodelers who expect their business to grow by 10 percent or more. A year ago, only 13.4 percent were willing to venture into these optimistic waters. This year, when asked the same question, the number is nearly a quarter — 24.2 percent — of all respondents.

The cause for optimism seems to be almost entirely rooted in a predicted improvement in their local markets for remodeling activity as opposed to better results due to planned increases in marketing and other strategic changes to their businesses, though these are also factors. More than 75 percent of remodelers say their local market for remodeling activity will be flat or better, and 42.3 percent see an outright increase in remodeling activity in their local markets this year.

What types of projects will drive that activity?

According to remodelers who answered our forecast survey, kitchen and bath remodeling is still the single strongest category of remodeling projects followed by maintenance-and-repair projects, exterior projects and room remodeling. The numbers also predict significant growth in the level of green remodeling and energy-audit based remodeling projects. Both ranked higher than insurance restoration, basement projects, universal design or aging-in-place remodels as well as historic restoration projects.

This is not surprising. A biennial report issued by Harvard University’s Joint Center for Housing Studies in February pegged green remodeling as one of three areas of the remodeling market (along with rental housing remodeling and immigrant-based demographics) that will spur the growth in remodeling in the decade ahead. Kermit Baker, the director of the Remodeling Futures program at the Joint Center, says that green remodeling is the place to be in the short term. Qualified Remodeler sat down with Baker and asked about the year ahead.

QR | Are the conclusions from the February report holding up well?
BAKER | As you know, there is not a lot of data (about remodeling activity), so I am going to have to rely on anecdotes for how well it has held up. The energy-efficiency and green-based activity still looks like it is a great spot. It is a remodeling niche that has held up very well. The rental remodeling market, short-term, has not held up well. It turns out that all of the overbuilding on the owner occupied single-family side swamped the rental stock in the short term. It is not moving forward yet because of the temporary excess inventory. The third growth driver identified was immigration and, sort of like the rental side, it is an important area of demand moving forward. But in this recession, even the immigration numbers have slowed quite dramatically. That being said, the trend has unfolded over the last 20 years, so it is certainly going to be a factor long-term.

QR | If you had to pick a month when the remodeling market hit, or will hit, bottom, which would you choose?
BAKER | Well, it is difficult. According to our Leading Indicator of Remodeling Activity (LIRA), we think that is happening this quarter (4Q 2009) or next quarter (1Q 2010).

QR | Are the projections from the indicator holding up?
BAKER | It looks like it is going to start climbing slowly back in 2010 and I think that is a reasonable scenario. Our projection looks like 2010 is going to be the mirror image of 2009. In 2009, we saw the market weaken as the year progressed and in 2010, I think we will see the market strengthen as the year progresses. And I am guessing that, in terms of overall activity, 2010 is going to just about equal 2009. Year-over-year, we will see almost no growth. What that means is that every quarter we will see incremental growth the same way we saw this industry step down in 2009.

QR | The government stimuli, are they working?
BAKER | This is going to be a guess. And I am going to talk only about the direct effect of the stimulus package, in contrast to the indirect effects, i.e., how much the stimulus package has helped the economy and therefore helped the industry, which I think is very important. So the direct impact I would think is in the single-digit (percentage growth) range in terms of market activity, probably in the mid-single-digit range, closer to five percent. It is a fairly narrow piece. It is basically the energy tax-credit stuff, and that is one of the strongest sectors that remodelers are seeing out there. Does 5 percent help? In this market, I would say, absolutely. But I don’t think that stimulus spending, in and of itself, is doing much to turn around the remodeling industry.

QR | When we look at the general economy and the larger housing market, is it tracking on a similar path to what you are seeing in the remodeling market?
BAKER | Let’s start with the macro economy. Certainly when there were the first signs that we might be headed into a recovery, there was a lot of talk about a double-dip recession. The overall economy looks like it is reasonably healthy. There are a lot more issues that need to be resolved. Lately we are hearing less about heading back down into recession. When you consider that about two-thirds of the stimulus spending has not even happened, there is a pretty good dose of stimulus to come. For 2010 the larger economy will remain in recovery phase, and if there is not rapid growth, there should be pretty good solid growth, something in the 2, 3 or 4 percent range.

As an aside, in the last several expansions since World War II, we typically see between 6 and 7 percent real growth, on average, during the first year of recovery. Historically, the economy bounces back very quickly. I don’t think we are going to see that, but it is important to note that there is generally a very strong tail wind coming out of recession. So even if there is not that real strong tail wind now, I think it is likely to keep things moving, going forward.

In terms of the housing market, I think we began to see encouraging signs beginning last winter, February through April. And I think there was a lot of talk that this was just one more blip and it was going to head down again. And it has bounced around a little, but every major indicator that you look at — house prices aside because that is slightly different — is showing more strength. When you look at starts, when you look at sales, when you look at inventory levels, they are all moving in a positive direction, not very quickly, but my sense is that we are on our way for a real recovery, albeit a relatively slow one. We have had four or five months of steady improvement in pricing. A lot of forecasters say that we are not done with this yet; we are going to see another 5 to 10 percent decline in house prices nationally before this is over. I think that is predicated on the foreclosure numbers picking up a little bit or remaining very high.

QR | Are we going to see discretionary remodeling spending come back a little more strongly in 2010?
BAKER | For as strong as this market was earlier this decade — for as much growth as we were seeing, I think you could make an argument that it certainly was not sustainable and maybe even was not that healthy from a fundamental perspective. You had a few types of really upper-end projects that were driving the market. At the peak of the market, you were not seeing a lot of additional homeowners undertaking home-improvement projects; you were just seeing an increase in the size of the projects. And that market has largely disappeared and is not going to return unless we get into a house price inflation spiral again, which is very unlikely. It is not inconceivable that we will see more kitchen and bath projects than we have seen in recent history, but they are not going to be as big or upper-end as they were. We are going to see households make those changes that make sense for their needs and their lifestyle. They are going to continue to spend on their homes; they are just not going to make these funny, investment-oriented decisions where they were they were trying to ride up the house-price-appreciation wave. So we have a market that is much more sustainable and much more evenly balanced. The discretionary projects will come back and there is some evidence that they are coming back. They are just coming back in a very different way.

QR | Are we seeing recovery take place more quickly in some regions of the country?
BAKER | It is coming back a little faster in areas that have traditionally been remodeling markets and places where they don’t have a glut of empty homes on the market. It is coming back a little more slowly in parts of California, the Southwest and Florida simply because as house prices are declining it is hard to get a home improvement loan and it is hard to justify the investment while prices are still declining. So those will be the last ones to come back. I think the Northeast will come back pretty strong, pretty soon. I think the Midwest outside of Detroit and other metros with a weakened economic base will come back soon because they are not competing with this glut of new construction that is depressing the market.

QR | Is the pent-demand for remodeling going to play out gradually or will there be a spike?
BAKER | I think it is going to hit gradually because a lot of what is missing now are the upper-end projects. There is not as much pent-up demand for those. The part of the market that has held up best involves the projects that you need to do — windows, siding, etc. I think these have been carrying the market. The pent-up demand will be for those projects that were put off at the onset of the recession and many will likely be scaled back in scope.

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