Remodeling Conditions Strong Despite Housing Slump: AIA

The fourth quarter of 2006 was a three-month period of pronounced weakness for the residential construction trade, although conditions remain strong for home improvement projects — particularly kitchen and bath remodels — even in the face of the current housing slump.

That was among the key findings resulting from the latest in a series of “Home Design Trends” surveys conducted by the American Institute of Architects. The survey was tied to conditions in the fourth quarter of ’06, according to the Washington, D.C.-based AIA.

Although the fourth quarter of each year is traditionally weaker at residential architecture firms, “there was a pronounced easing this past quarter,” the AIA noted, adding that more residential architecture firms reported billing declines than reported increases, while more firms also reported declines in inquiries for new projects than reported increases. The slowdown was felt in all regions, although the South and West fared better than the Northeast and Midwest, the AIA said.

For virtually all construction sectors, residential architects reported weaker conditions at the end of 2006 than they had a year earlier. Conditions for entry-level homes were reported as particularly weak.

The association observed, however, that conditions “remain strong” for home improvement projects. Over half of the respondents see addition-and-alteration projects to existing homes as improving, as do 44 percent of respondents for kitchen and bath remodels (see chart, on the right).

Market Drivers

Existing-Home Sales’ ‘Surprise’ Move Upward

The sharp rise in existing-home sales in February, while welcome, “is a bit of a surprise,” the leading analyst for the National Association of Realtors said last month. According to David Lereah, chief economist for the Washington, D.C.-based NAR, the strong February gain may be attributable to mild weather, although fundamentals “have improved in the housing market and buyers see a window now with historically low mortgage interest rates and competitive pricing by sellers. Recent unusual weather patterns, Lereah said, “may mean home sales that close in March may decline before rebounding later this spring.”

Total existing home sales — including single-family units, townhomes, condominiums and co-ops — rose 3.9 percent in February, to a seasonally adjusted annual rate of 6.69 million units. While below the 6.94-million-unit pace in February 2006, the increase was the biggest monthly rise in three years, NAR reported.

Market Indicators

Joint Center Unveils Leading Indicator for Remodeling

One of the leading research organizations covering the remodeling industry recently took the wraps off of a new leading indicator for remodeling activity, and if correct, points to a slower growth rate for remodeling toward the end of 2007.

Harvard University’s Joint Center for Housing Studies released the first projections of remodeling activity from its new Leading Indicator of Remodeling Activity (LIRA). According to the indicator, remodeling activity will start 2007 with a 4.1 percent growth rate in the 1st quarter and slow to 2.4 percent in the 2nd quarter and 1.9 percent in the 3rd quarter.

The LIRA indicator was constructed using a number of existing data points relating to the remodeling market as well as the broader economy.

Those input include:

  • The National Association of Realtors Pending Home Sales Index
  • The NAHB’s Remodeling Market Index
  • ECRI Weekly Leading Index
  • ISM Manufacturing Composite Survey
  • Retail sales at Business Materials Stores and Dealers
  • Shipments of Appliances, Wood Products, Construction
  • Estimate of Current Improvement Spending
  • Hours worked by Remodeling Contractors
  • Freddie Mac Cash Out Refinancing Data

The indicator just tracks owner-occupied share of remodeling activity. It pegs the dollar volume of remodeling activity at $177.1 billion annually during the 1st quarter of 2007, a rate of $182.5 billion during the 2nd quarter and $184.3 billion during the 3rd quarter of 2007.

The Joint Center’s Amal Bendimerad, who led the development of indicator, says the success of the LIRA will be monitored closely over time.