Constructive Signs Up Ahead

Constructive Signs Up Ahead

A year of national tragedy, disasters and stock market turbulence spawns a surprisingly optimistic economic forecast for 2002. 

By Daina Darzin Manning

"Without a doubt, September 11 and, to some degree, the anthrax scare, put the brakes on a lot of new construction, and has affected the [kitchen and bath] remodeling market," states Tim Aylor, construction economist for the Raleigh, NC-based FMI, management consultants to the construction sector. "The interest in new construction residential dropped dramatically in September. The week or two after the [terrorist attack], people almost didn't want to go out of their doors. You saw less traffic through houses, and fewer offers being made despite almost record affordability."

"Our surveys of builders and remodelers show that there were some negative effects [because of 9/11]," confirms David Seiders, chief economist for the National Association of Home Builders, in Washington DC. "We're getting some inkling of an increase in the cancellation rate. Some of the builders are becoming quite cautious about their speculative building and extending options on land contracts."

"It's still not clear what the impact will be," adds Kermit Baker, director of the remodeling futures program for the Joint Center For Housing Studies, in Cambridge, MA. "It's negative, but how negative is still up in the air. Most remodelers are saying they're not seeing a dramatic impact on their workloads." 

While a host of projects already in progress seem to be cushioning the kitchen and bath industry from the worst of the impact, some report new orders are slowing a bit. "Some contractors were carrying 4-6 months of backlog," Baker notes. "[Clients] aren't canceling their projects [if] they had the financing together." However, he adds, "We had a horrendous employment report for October. People are pretty nervous about the underlying condition of the economy and that's not generally the time for discretionary expenditures like remodeling." 

Some believe this is particu-larly true in regions hard hit by the failure of many dot.coms, such as the Silicon Valley, San Francisco and Boston, as well as in states dependent on tourism as a primary source of income. Airport hub cities such as Dallas/ Ft. Worth may also also suffer economically because of the downturn in airline travel, while the Midwest faces challenges due to lost manufacturing jobs. 

But Kevin McNulty, executive v.p. and COO of the National Association of the Remodeling Industry (NARI), in Des Plaines, IL, insists, "Some of my busiest remodelers are in the Silicon Valley area. Americans are [still] spending." 

And Lawrence Yun, senior forecast economist for the National Association of Realtors, in Washington, DC, points out, "Overall, the housing sector has kept the economy from dipping into a recession prior to September 11. Post-September 11, it will again be the housing sector providing a buffer zone from sinking deeper."

A Shallow Recession

"The unanimous [opinion] seems to be, [this is] a recession of relatively short and shallow duration," notes Dick Titus, executive v.p. of the Kitchen Cabinet Manufacturers Association, in Reston, VA. While he forecasts a downturn in late 2001, he believes things will start to pick back up during the first or second quarter of 2002, "[with] no significant improvement until 2003. We anticipate a flat year coming up."

"[The economy] hasn't fallen anywhere near the level of previous recessions," points out Seiders. "The numbers look more like the mid-'90s, when the Fed had been tightening, and housing lost some ground on a temporary basis." He adds, "We did some trimming to our forecast compared to our pre-attack forecast. We trimmed economic growth numbers and jacked up our expectation of unemployment. We trimmed our estimates of housing starts and remodeling activity through the fourth quarter/first quarter and into the second. And then [we] installed quite a spirited comeback the latter part of [2002] and 2003."

"We anticipate the current recession to be one of the mildest in history, with economic rebound by spring 2002," declares Yun. He adds that U.S. successes in the Afghan war, as well as record auto sales due to 0% financing, were already positively impacting the economy in fourth quarter 2001. 

McNulty points out another motivator: "There's such a push by national leaders to go out and spend it was [presented] as a patriotic gesture." 

"You hear a lot of different forecasts, but the consensus is that the recession began in the beginning of the fourth quarter and it's likely to be a two-to-three-quarter recession," says Baker. "We could see some better numbers by late spring." 

But, he warns: "I don't think we should be writing off this recession yet, since we don't know what its core characteristics are. And the thing that prompted it the terrorist attack could well reappear. It's premature to be writing about our revival until we see how the current situation will stabilize out." 

Baker also points out, "We were heading into recession independently of [September 11]." 

Agrees Aylor, "Consumer confidence was edging downward from the first quarter of [2001], because of the stock market and recessionary conditions in some sectors of the economy manufacturing, the service sector, financial, telecommunications. These were all slowing down and layoffs were hurting consumer confidence even before [9/11]." 

Low Interest Rates

Low interest rates are uniformly cited as the reason why the housing and remodeling markets are in far less trouble than they might have been. 

"Mortgage rates are at their historic lows," declares Yun. "And when the mortgage rate goes down, it qualifies new potential homebuyers who couldn't [afford home ownership] before. You're enlarging the pool of eligible buyers."

Yun predicts that the low-end market will avoid the impact of the recession better than the high end, which was hurt by the turbulent stock market. "[2001] was a really sharp stock market correction, so a lot of people have lost wealth," Yun elaborates.

Seider agrees: "A lot of people on the high end lost equity in the stock market," he notes. "The upper end of the trade-up market seems to have taken a pretty serious hit." 

Adds Aylor, "At some point, people don't want to take the money necessary for a down payment out of their stock portfolios if they're going to incur a loss. So, you're seeing a topping out of the upper-end market." 

But, on the lower end, economists note that twenty-something dot.comers seem to have re-bounded from their industry's collapse, and are still buying condos and starter homes.

Overall, economists agree that the housing market isn't as hard hit as some parts of the marketplace, such as the manufacturing sector. 

"The new housing and remodeling outlook is not gloomy," insists Titus. "We're seeing a downturn, but housing has done relatively well in this current economic condition. There has been a lot of demand, and remodeling has been strong." 

Seiders believes that there has been somewhat of a pull back in the remodeling market, but, "on the positive side, the one thing we've gotten out of this mess is even lower interest rate structure than we had." He also points out the positive investment aspects of home ownership as a plus for the future of housing and remodeling. "The condition of the stock market, the major uncertainty created by the war it does seem like people [have] a hearth-and-home feeling about things," he observes.

Several economists mentioned the "cocooning" effect as a positive force for the housing market that, ironically, September 11 might have intensified. These days, fear of air travel is causing people to cancel travel plans and perhaps use that money to improve their home. "September 11 is going to continue to reinforce the cocooning effect," believes Titus.

Low interest rates help the remodeling market as well, with second mortgages and consolidation loans wherein the remodeling loan is also used to pay off credit card debt, frequently resulting in a lower monthly payment overall popular options. "[That's] clearly a driver," says McNulty. "The interest rates are fueling additional participants in the remodeling market."

Do lower housing starts also mean more remodeling jobs, as consumers decide not to buy a new house, but fix up the one they have instead? Economists say no.

"There's always been this notion of remodeling as being this balance wheel when new home construction eases, but history tells us the two have moved in tandem," says Baker. "[And], there's always a third choice, which is to do nothing. When economic times are uncertain and people are nervous about their outlook, doing nothing is what they gravitate toward."

Overall, it boils down to consumer confidence, economists agree. "When confidence levels drop, despite affordability, you have people holding off on decisions," says Aylor. 

Consumer confidence is tied up to September 11 and the anthrax scare, Titus believes, but "the way things are continuing to unfold, consumer confidence is returning." 

Don't Do It Yourself
A year ago, if you asked remodeling professionals what their biggest problem was, the answer was "difficulty finding, training and keeping good workers." Ironically, this challenge has worked to remodelers' advantage during this period of economic uncertainty. These days, remodelers are staying busy because previously, there was too much work to go around. 

"The demand for remodeling work is clearly outstripping supply in some areas," notes McNulty. "Our [remodelers] could take on a lot more work if they had the [employees] to do it." He points out that his organization is making efforts to get more workers into the remodeling trades, such as offering a certification program on a high school level as well as Spanish language versions of the organization's materials to accommodate a rapidly growing portion of the remodeling work force. 

Titus adds that the failure of many dot.coms may contribute to a resurgence in people wanting to go into the skilled trades. "A lot of younger people were attracted to high tech, and now that's lost some of its charm," he notes. "Stability is becoming more important." 

Part of the optimism economists feel for the next year stems from the fact that, for a lot of consumers, 2002 is the year they have to get their roof replaced. Several economists point out that a significant number of baby boomer homes are coming up for non-discretionary home repair, and McNulty adds that, often, an optional remodeling item will get included in the job.

Aylor notes that this phenomenon is particularly prevalent in the Southeast, Southwest, the Sun Belt and the Mountain states, all of which enjoyed a population migration in the '60s and '70s. 

"Many of the systems within a home plumbing, kitchens typically have a lifespan of 25 to 35 years," McNulty explains. "A lot of these [homes] have to be [remodeled]. That's the driver for our optimism for the next few years."

Baby boomer clients are also likely to call a professional remodeler rather than do it themselves. "The baby boomers are older and have more disposable income," explains McNulty. "If they have to redo their kitchen, they're going, 'eh, let's hire somebody.' "

"[Baby boomers'] income is growing and their desire to get on the roof to nail those shingles is diminishing," quips Baker. He adds that projects that add quality to a home also don't lend themselves to the do-it-yourselfer: "If you're paying a lot of money for granite countertops, you're not going to risk screwing it up by doing it yourself."

Though the growth of professionally installed projects is significant, it's a different arrangement from the past, when a designer or general contractor came in and took care of everything. Frequently, consumers are turning to the "buy it yourself" plan, where a customer will buy a product from Home Expo and hire the store's staff to install it. 

"It's certainly something that the big boxes have a strong interest in," says McNulty. "They have figured out that they make more money on the sale of service than the sale of materials. They're moving into the remodeling area, [but] they need to find installers. They don't have that labor force, so they're building [alliances] with remodelers."

Adds Yun, "Home Depot had a very good profit in the recent quarter. People are investing in their homes, not only as a shelter, but as an investment. With the tanking of the stock market, people may be putting more money into upgrading their home." 

Aylor also credits bargain prices for building materials as a part of big box success. "We see very brisk sales," he says. 

But Titus adds that consumers have grown more cautious: "Things will be a little more conservative, a little more guarded," he believes, anticipating people will choose more practical, "meat-and-potatoes" products over edgy, trendy ones. 

He adds that, when it comes to cabinetry, "there's been some slow down in the custom end, but still, most of the people I talk to are enjoying strong years [selling custom cabinets]." 

Seiders points out that activity postponed because of economic problems tends to come back into the market not too far down the road. "This is what makes housing so cyclical," he explains. "You get this pent-up demand that's generated during this slow period." He predicts this is part of what will give later 2002 and 2003 its economic "bang."

Aylor concludes that even the worst parts of the past year were not as bad as they could have been. "October retail sales [had the] biggest rebound ever," he declares. "So, we think it's a mistake to be too pessimistic."