Down But Not Out

While there’s no question that the extended housing boom is over, current economic conditions have left many kitchen and bath professionals scratching their heads about what to expect in 2008.

Is the housing drop-off simply an inevitable and healthy market correction – a normal slowing of the record-setting, white-hot market of the past five years? Or is there genuine cause for concern about the long-term future for the kitchen and bath market?

While economists are split on exactly when the housing market will pick up again, most agree that both the housing and related kitchen/bath markets are fundamentally sound and poised for long-term growth, when the current downturn subsides (see related Editorial and Barometers).

Exactly when the expected recovery begins, and how steep the downturn becomes, remain questions, however.

Even residential remodeling expenditures, steady and growing for years in the face of economic volatility, have been impacted by current market conditions.

Stagnant or declining house prices and lowered consumer confidence have resulted in declines expected to extend well into 2008, according to the Leading Indicator for Remodeling Activity (LIRA), developed by Harvard’s Joint Center for Housing Studies. LIRA notes that homeowner spending for home improvement activity likely fell in 2007 for the first time since 2003, declining 2.3% from 2006 levels.

According to the latest remodeling forecast by the National Association of Home Builders, the continued erosion of housing activity coupled with the sharp deceleration in house price appreciation will curb growth in 2007 and 2008, before expenditures recover in 2009.

The latest available figures from the Census Bureau lend credence to this forecast, showing weakness in remodeling expenditures in the first quarter of ’07 relative to a year earlier.

Given the pro-cyclical nature of home improvement spending, owner occupants will reduce improvement expenditures in 2007 and 2008 as the housing market struggles to find the bottom of the current housing correction, the report notes.

“The recent problems in credit markets are expected to dramatically reduce the level of cash-out mortgage refinancing activity,” says Kermit Baker, director of the Remodeling Futures Program of the Joint Center. “Given that equity withdrawals have been a key source of funding for home improvements, market spending is expected to suffer.”

The Good News

But while the immediate outlook may seem bleak, overall, homeowner remodeling activity – including work on kitchens and baths – is expected to grow 44% from 2008 to 2015 – or 3.8% per year in inflation-adjusted dollars, according to William Apgar, senior scholar at the Joint Center. “At the same time, D-I-Y spending should grow a respectable 3.2% annually and increase almost 38% [overall],” he notes.

The Joint Center forecasts that increases in the numbers of immigrants, seniors and non-family households, especially as the high-end market segment returns, will ensure solid growth in remodeling activity over the coming decade, thereby producing a more balanced and sustainable pace of growth.

Additionally, the rising fuel prices and growing interest in “green” alternatives have helped drive demand for remodeling that pays back homeowners in terms of energy savings and healthier overall living environments.

Certainly, kitchen and bath professionals can expect to face some challenges in the coming year (see related story, Page 60). After strong growth earlier this decade, where low financing costs and strong returns to house values encouraged upper-end remodeling projects, many homeowners are putting their remodeling projects on hold until the market stabilizes, analysts say.
However, “When the industry emerges from its current slowdown, investments in older homes that missed the last round of home improvements, the desire for energy efficiency retrofits, and growing pressure to upgrade the rental stock will ensure a healthy recovery,” observes Nicolas P. Retsinas, director of the Joint Center for Housing Studies.