A Reason To Believe

A Reason To Believe

Higher interest rates should cool off the housing market in 2000, but the continued push toward kitchen and bath remodeling should kick the new millennium off on a positive note.

by Daina Darzin

It's the time of the year when analysts and businessmen throughout the kitchen and bath industry are peering into their economic magic Eight-balls and, for 2000, the answer seems to be, "outlook is good."

"There's a lot of optimism about the year 2000," comments Brett Martin, a spokesman for the National Association for the Remodeling Industry, in Alexandria, VA. "We expect it to be better than 1999."Many others, though, are not nearly that optimistic, even though they assert that 2000 should be another very solid year for the housing, remodeling and kitchen/bath industries."We're not going to approach the level we had in 1999," predicts Kory Bockman, an economist with the National Association of Realtors. "Last year will probably be a record for all aspects of the housing industry. Everything just fell into place. We had low interest rates, low mortgage rates, strong job gains, strong productivity gains and income gains without causing inflationary pressure. We also had exuberant consumer confidence as a result of the booming stock market."

"However, a slowdown in the economy and the housing sector in 2000 is viewed as virtually inevitable," Titus points out. "Depending on what happens with interest rates, the impact could be felt more in the housing industry, which is sensitive to interest fluctuations."

Total kitchen and bath cabinet demand, in fact, is expected to decline slightly this year, according to the latest estimates from the KCMA, which projects total cabinet demand in 2000 to be 78.8 million units, down 1% from an estimated 79.5 million units last year (see graph). The decline, according to the KCMA, will be attributable to an anticipated decline in new residential construction. In contrast, cabinet demand in remodeling is expected to increase again in 2000 after posting yet another gain in 1999 and should account for 75% of the total U.S. cabinet market this year (see related story, Page 48).

Strong base
Among the factors responsible for the success of 1999, economists say, was an influx of money from overseas markets, as the Asian financial crisis prompted people to look for a safe market in which to put their money. "Clearly, the wealth effects [of a booming stock market] have been very powerful in the last few years," observes Maury Harris, chief economist at the New York-based Paine Webber.

The stock market has been rising by some $2.2 trillion a year, contributing about $45 billion annually to personal spending, Harris notes. But 20%-30% increases in stocks are "a thing of the past," he asserts. "We don't think the stock market is going to go up as fast in 2000 as it has in the last couple of years, so the incremental wealth effects won't be a strong. Instead of 25%-30%, maybe it'll be 10%."According to Robert Barr, a senior economist with Fannie Mae, personal spending has powered the recent economic boom, and while consumer confidence remains strong, there may be signs of a slowdown already in place.

"A lot of consumer spending has been fueled at least in part by the wealth-effect of the stock market," Barr explains. "If the stock market continues to go down or move sideways, it will remove one of the impetuses for continued consumer spending and may also affect remodeling jobs and home purchases."

Even so, many economists believe that the effect of rising home prices on consumer spending is more pronounced than that of rising stock prices. According to Federal Reserve chairman Alan Greenspan, roughly one-sixth of the rise in consumer spending in recent years is attributable to rising home prices.

For the residential construction market, three key factors to watch in 2000 and beyond, Barr suggests, are household growth which remains strong job growth and worker productivity.

"Dr. Greenspan is . . . going to keep raising interest rates," explains Loy. "[But] I think we're all going to keep spending money until we get afraid a little bit and what's going to make us afraid is the fact that our neighbor has lost his job. At that point, our confidence will begin to drop."

The result of that eventual decline in consumer confidence, he explains, will be less spending and more of an effort to pay off consumer debt. Harris adds that the predicted drop in housing starts has "got to affect the kitchen and bath industry in terms of new construction. We're [also] seeing a cutback in existing home sales" from a peak period. In terms of good news, Harris predicts that inflation and unemployment will both remain low, helping to ensure a stable economy. Bockman agrees, forecasting a strong first quarter with a leveling off throughout the year.

Remodeling strong

"The aging of baby boomers, rising U.S. home ownership rates, and the sharp increase in the number of aging American homes will continue to produce solid growth in the remodeling market," explains the KCMA's Titus.

Recent increases in the homeownership rate and home prices "have been creating a stronger image of housing as a good investment" while adding to homeowner equity, and have been stoking both consumer confidence and the demand for remodeling jobs, notes National Association of Home Builders chief economist David Seiders.

Indeed, the forecast for overall U.S. residential remodeling expenditures is positive. U.S. expenditures for residential improvements and repairs should amount to $128.4 billion this year up from the estimated $126.7 billion spent in 1999 according to Seiders and the NAHB.

Conventional wisdom holds that the new construction and remodeling sectors are contracyclical if people aren't buying new homes, they might be more inspired to remodel the ones they have. But experts disagree as to whether this is actually true. "That historically has not been the relationship," says Kermit Baker, director of the remodeling futures program for The Joint Center For Housing Studies at Harvard University. "The years that you see real strong remodeling activity are the years you see real strong new construction. The markets move up together."

Counters NARI's Martin, "When people have bought what they consider to be a starter house and they like the house, the neighborhood and the school they'd rather take the money for a new home and turn their current home into their dream home. That seems to be a popular trend."

"Most people are looking to improve the quality and enjoyment they get out of their home," Bockman comments. "When people make modifications, they choose things they personally enjoy. That tends to add value to the home anyway."

"We're seeing a lot more upscale projects," agrees Martin. "Evidently, people have that money right now." Even with a middle-class budget, "People have a little more money so they want to do a little bit extra."

"A lot of remodeling seems to be triggered by changes in household composition, both bigger and smaller," explains Baker. "When households downsize, [for instance], a kid moves out to go to college, [or] even a death, it changes the way a household is using that home." This prompts a reconfiguration of space, for instance, making the college-bound child's room an exercise room or home office. Experts also agree that consumers don't start remodeling the instant they move into an existing home, preferring to stabilize their budget after mortgage, closing costs and other expenditures. Loy puts the estimate for major renovations at six to 12 months after moving; Baker says it's more like 12 to 18 months. The market for new kitchens and baths is split into several demographic groups, experts say. "The younger buyers, families starting out, tend to buy existing homes and fix them up," believes Bockman. "They generally don't have the capital to get into a new home. Newer homes are typically going to people who have older children who have gone on to college so they want to move into a home that doesn't take much effort to maintain."

But Baker says the most extensive remodeling occurs with trade-up, older buyers rather than younger ones, because they have the financial resources to make all of their dream house wishes come true. "The peak time [for remodeling] is when households are in the 35-44-year-old group," he notes. However, 50ish empty nesters are also likely to do one more remodel to ready the home they're going to grow old in. Remodeling activity drops sharply after age 65, notes Baker, with any projects thereafter likely to be a matter of necessity more than choice.

Despite all the good news regarding remodeling activity, however, at least one analyst sounds a note of caution over the prospects for a perpetually expanding market: Remodeling, he notes, is not a repeat purchase.

"There's been above-average growth in this area," says Paine Webber's Harris, "[but] if you've already done it, it doesn't matter how much money you made in the market, you don't want to do it again for a while." KBDN