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State of the Industry: Slow but Improving

The economy and housing industry are starting to improve as shown by data presented in this week’s webinar by the National Association of Home Builders Remodelers. David Crowe, Ph.D., chief economist with NAHB, and Kermit Baker, Ph.D., director of the Remodeling Futures program, Harvard University Joint Center for Housing, provided an in-depth look at the housing industry and forecasted what we can expect from the industry in the next year.

The good news: The industry is getting better and the environment is starting to resemble pre-boom levels. Prior to 2005, the ratio of income to home prices was about 3.2. During the boom, consumers were buying homes almost five times their incomes. However, they were back down to 3.13 in 2011, says Crowe.

Distressed properties

“Affordability is back to where it belongs but not everywhere,” Crowe adds. Local data is important to consider as markets are not all the same. For example, it takes almost 18 months for homes with seriously delinquent loans – a loan that is 90 days behind – to be sold in Florida. However, it takes approximately one month in North Dakota.

The NAHB introduced its Improving Markets Index last year to evaluate local markets so to better understand the state of the industry. Since its introduction, there are now 100 markets that are showing signs of recovery. The IMI looks at home prices, single family permits and employment data. “Recovery is different place to place,” Crowe says.

The industry is still dealing with a large inventory of distressed homes, Baker says. “Home prices are being held back by distressed sales. Often brokers have to use distressed properties as comparisons,” he adds.

Markets that were overbuilt during the boom are starting to show signs of stabilizing. These are areas like Orlando and Phoenix. “Prices will continue to waffle,” Baker says. “Areas with the steepest decline still have the highest numbers of underwater mortgages.”

Though distressed properties are declining, they still pose a large problem for the industry. More than $8.5 billion was spent on distressed properties with $2.3 billion of that spent to prepare the property for sale.

Slow but steady

What homeowners are choosing to remodel provides insight into the health of the industry. Prior to the 2005, homeowners improved spaces in their homes for themselves, not necessarily to make a profit. During the boom, it was the opposite; homeowners remodeled in preparation for sales and to make money – a common trend of flipping. During a recent survey, it showed that homeowners are now choosing to remodel bathrooms more than any other part of the house - including whole-home remodels.

In addition, homeownership is still viewed as a positive investment by renters according to recent data shown in NAHB’s webinar. Younger households view homes as a good place to raise children, safety, investment and wealth.

Forecast

The home improvement segment may be improving, but it’s still below the peak: $300 billion last year compared to $326 billion in 2007. “Remodeling contributed a growing share of residential investment since the downturn – 70 percent in 2011,” Baker says.

The aging-in-place segment is a key area for remodelers to focus, Kermit says. “[These homeowners] have saved up money, they want to stay where they are and remodelers need to do a better job of meeting that demand.”

Crowe agrees with this sentiment. “They may also be stuck in their homes due to equity and will need to remodel their homes.”

Crowe’s forecast is for a moderate increase: 2.3 percent GDP growth rate for 2012, and 2.7 percent by 2013. “The remodel recovery is low compared to past recoveries,” Crowe adds. “Residential remodel will continue to increase.”

“Indicators point to a healthy upturn for the second half of 2012,” Baker says. “It will be a sustained upturn.”

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