While housing starts have fallen sharply from the peak in early 2006, the remodeling market has shown a much smaller decline.
Remodeling activity evidenced some pressure from the housing downturn during the fourth quarter of 2007, according to the National Association of Home Builder’s (NAHB) Remodeling Market Index (RMI). The current market conditions indicator decreased to 40.9 from 46.2 in the third quarter. And the future expectations measure declined to 37.9 from 43.3 in the previous quarter.
“The decline in the remodeling market is far less than in the new home market and generally consistent with our remodeling forecast,” said NAHB chief economist David Seiders.
“While the housing downturn has impacted the remodeling market to some degree, it is on a much smaller scale than the rest of the market” said NAHB Remodelers chairman, Mike Nagel, CGR, CAPS, a remodeler from Chicago. “Homeowners realize the importance of maintaining their property and making necessary repairs to support the value of their homes, so we expect this type of work to start to pick up again.”
Historical data show smaller fluctuations in the remodeling market as well as a time lag between movements in new housing production and remodeling activity.
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 slightly below 50 since the final quarter of 2005.
Nationally, the RMI components for major additions and alterations during the fourth quarter declined to 42.28 (from 46.89). Minor additions and alterations also decreased to 41.76 (from 47.07) except for an increase in the South region to 49.81 (from 43.68). Maintenance and repair remodeling work declined to 38.11 in the fourth quarter (from 44.31).
The RMI “special questions” section during the fourth quarter asked remodelers about business conditions during 2007 and their expectations for the entire year of 2008. Forty-three percent of respondents reported an increase in billing in 2007, while 25 percent reported that billing stayed at the same level as in 2006. With respect to 2008, 51 percent predict a dollar volume increase and 27 percent predict maintaining the same volume for the entire year. These results suggest that while remodelers see slower conditions in their business during the short term, the long-term prospects look good with a remodeling market recovery by the end of 2008.
Existing-home SalesSales to Hold in Narrow Range, Then Begin Upward Trend
A continuation of soft market conditions is forecast for existing-home sales in the months ahead, with improvement expected by the second half of this year if loan limits are increased, according to the latest forecast by the National Association of Realtors (NAR).
Lawrence Yun, NAR chief economist, said sales activity is expected to remain soft through the first half of the year despite a generational low in mortgage interest rates. “Household formation was only half of what it should have been last year given the demographics of a growing population and sustained job growth, so there clearly is a pent-up demand from buyers who are on the sidelines,” he said.
“Existing-home sales have moved narrowly since last September, but when the full impact of higher loan limits for conventional mortgages begins to impact the market, there is likely to be a notable rise in home sales and prices. If higher limits are enacted very quickly, we’ll see a faster and more meaningful recovery by expanding safe, affordable financing in high-cost areas — that, in turn, would help to stimulate overall economic activity.”
The Pending Home Sales Index, a forward-looking indicator based on contracts signed in December, slipped 1.5 percent to a reading of 85.9 from a downwardly revised index of 87.2 in November, and was 24.2 percent below the December 2006 level of 113.3. percent. “We’re seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly,” Yun said.
Existing-home sales are projected at an annual pace of around 4.9 million in the first half of this year, rising notably to 5.8 million in the second half, and totaling 5.60 million for all of 2009. The aggregate existing-home price should decline 1.2 percent in 2008 to a median of $216,300, and then rise 3.2 percent to $223,200 in 2009.
“Areas with a high prevalence of subprime lending will continue to feel downward price pressure. Where builders have cut construction sharply, and in most areas with improving affordability conditions, we’ll generally see moderately higher home prices,” Yun said.
Home PricesYear-end Numbers Mark Widespread Declines
Data through December 2007, released by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, show broad based declines in the prices of existing single family homes across the United States, marking 2007 as a full year of declining home prices.
The decline in the S&P/Case-Shiller U.S. National Home Price Index — which covers all nine U.S. census divisions — neared double digits, posting -8.9 percent vs. the fourth quarter of 2006, the largest decline in the series’ 20-year history. During the 1990-91 housing recession the annual rate bottomed at -2.8 percent.
The 10-City Composite also set a new record, with an annual decline of 9.8 percent. In December, the 20-City Composite recorded an annual decline of 9.1 percent.
“We reached a somber year-end for the housing market in 2007,” says Robert J. Shiller, professor at Yale University and chief economist at MacroMarkets LLC. “Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates.
“Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns.”
Miami remains the weakest market, reporting a double-digit annual decline of 17.5 percent, followed by Las Vegas and Phoenix at -15.3 percent each. In December, San Francisco slipped into negative double-digit territory with an annual return of -10.8 percent. Charlotte, Portland and Seattle are the only three MSAs still experiencing positive annual growth rates; however, Seattle came in at only +0.5 percent, an almost flat growth rate.
Consumer ConfidenceHomeowners Believe Their Homes Held or Increased Value
Despite highly publicized reports of a home sales slump and pricing slides, there’s a surprising amount of positive consumer sentiment. Even in a negative home pricing environment, 77 percent of homeowners from around the country believe the value of their home has increased or remained the same in 2007, according to a recent Zillow.com survey conducted by Harris Interactive.
What’s more, sizable fractions of all homeowners — not just those who believe their homes appreciated in 2007 — say they are planning spending on home improvements in 2008. According to the survey, 82 percent will spend the same or more on minor home improvements (install new garbage disposal, repaint or wallpaper a room), and 67 percent say they will spend the same or more on major home improvements (replace the roof, remodel the kitchen) this year.
About a third say they are more likely or equally as likely to take out a home equity loan (35 percent), refinance their mortgage or take out a second mortgage (36 percent), or sell their homes (34 percent).
“This survey reveals that despite the data to the contrary, people either aren’t paying attention to their housing market or are in denial about their own home’s value,” said Dr. Stan Humphries, Zillow.com vice president of data and analytics. “This likely reflects the fact that most Americans have not realized home-related losses because they’re staying in their homes. Even in declining markets most people are not really affected by declining values unless they absolutely must sell or need to immediately refinance or withdraw equity. This has contributed to the healthy investment intent, particularly in home upgrades, despite the downward trending markets.”