Market Overview

Estimated recent growth of homeowner remodeling spending has eased substantially but still remains near its long-term rate of 5 percent. According to the Remodeling Activity Indicator (RAI) devised by Harvard’s Joint Center for Housing Studies, homeowners spent over an estimated $155 billion on home improvements and repairs over the past four quarters, representing a 4.5 percent increase over this period.

“Rising interest rates and a cooling housing market have started to impact spending on home improvements. Delays in initiating major improvement projects are likely to moderate spending over the next year,” says the director of the Joint Center, Nicolas Retsinas.

“Remodeling contractors recently have reported a slight decline in hours worked by their employees, and more modest growth in their payrolls,” says Kermit Baker, director of the Remodeling Futures Program of the Joint Center. “This points to remodeling following home building into a period of slower growth in the months ahead.”

The Joint Center’s Policy Advisory Board and other industry sponsors support the Remodeling Futures Program. Qualified Remodeler magazine participates as a member of the steering committee of the Remodeling Futures Program.

Housing Market

‘Soft Landing’ Predicted

After soaring to record levels for three consecutive years, the single-family housing market is gliding toward a “soft landing” in 2006, as rising interest rates, affordability issues and a reduced role for investors and speculators contribute to declining demand.

That was the consensus of a group of economists who addressed attendees at the recent semiannual National Association of Home Builders (NAHB) Construction Forecast Conference (see related graph).

“After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition,” said NAHB chief economist, David Seiders. “Sales and starts are trending lower, toward more sustainable levels.”

But even so, Seiders observed, the slowing housing market is not likely to derail the nation’s overall expansion, as housing yields its position as the economy’s major growth engine to other economic sectors.

“The housing sector is going through an adjustment, not a collapse,” agreed Michael Moran, chief economist at Daiwa Securities America Inc.

Taking a bullish view on the economic outlook, Jim Glassman, managing director of JP Morgan Chase & Co., said several factors will bode well for housing.

“Real estate is pricing itself back to reality, and in the long run it is reasonable to expect starts in the 1.8 million to 2 million range,” said Glassman. “Housing won’t continue to make the same contribution to the economy that it has. But when I think about where the economy is, I think we’re in the fifth inning with a good chance of going into extra innings. This expansion may prove to be the longest one ever seen.”

Looking ahead, Seiders noted that new-home sales in the first quarter of 2006 were down 10 percent from the fourth quarter in 2005, and said that he expects them to ease further in the coming months before leveling off in 2007. The NAHB is forecasting new-home sales will hit 1.13 million units in 2006, down 12 percent from last year’s all-time high of 1.28 million units, and then move down slightly in 2007 to 1.09 million.

After posting a record 1.716 million single-family starts in 2005, NAHB is predicting new-home construction will level off to 1.595 million units in 2006 and 1.488 million in 2007, which would still rank high by historical standards.

Lumber Prices

NAHB Calls Proposed Pact a Bad Deal

American home buyers will be forced to pay a premium for lumber if a tentative trade agreement between the United States and Canada goes into effect in the coming months, says the NAHB.

Under the accord, taxes on Canadian lumber shipments into the United States would move progressively higher once the price drops below the following thresholds: $355, $335 or $315 per thousand board feet. The price of lumber was $377 per thousand board feet when the pact was announced on April 28 and has since fallen to $364 as supplies have increased and demand has fallen. “By the time the agreement is finalized, prices may well be down below $315, in which case its implementation would be a severe jolt to the market,” said NAHB CEO Jerry Howard.

In the interim, U.S. consumers pay tariffs totaling nearly 11 percent on Canadian lumber shipments, despite several NAFTA panels that have ruled U.S. lumber producers are not threatened.