Looking Good

Remodelers are an optimistic group by nature. How else can they routinely pull apart someone’s home and expect to put it back together better than before?

So it should come as no surprise when asked about the remodeling market for 2013, they’re enthusiastic. Fifty percent of respondents to a recent Qualified Remodeler survey predict a good year, and 11 percent proclaim it will be excellent. Even those less positive (32 percent) say it will at least be fair. Only 6 percent anticipate a poor year.

Virtually all the indicators, whether they are specific to remodeling, new residential construction, real estate or the economy in general, support this show of confidence — with the inevitable caveats, of course.

In October 2012, the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University suggested a robust recovery of the remodeling market with double-digit growth in the first half of 2013. (The next LIRA report will be released on January 17.)

Forecast on Track

Kermit Baker, director of the Remodeling Futures Program at the Joint Center, says the forecast seems to be on track, noting that third-quarter data for 2012 is coming in stronger than projected. Originally, the LIRA anticipated a reasonably weak third quarter, but “the trajectory seems to be even a bit stronger than we thought it was going to be,” he says.

A significant factor driving the remodeling recovery, Baker says, is a strong recovery in the broader housing market. “Housing starts and new home sales are coming off an incredibly weak base, but we’re seeing strong growth. We’ll probably see close to a 25 percent increase in housing starts in 2012, when we get the numbers in, and the consensus is for another 25 percent in 2013. That will take us up to a million starts or so. I think, and most others feel, once our economy is back to normal it can support 1.5 to 1.7 million starts. We’re still well below where we think we’ll be in a few years, but those are good solid numbers.”

With a strengthening housing market, home prices start to increase and the mobility of homeowners rises as well. “Mobility is very important for home improvement activity; that’s the most common time [when homeowners move into a new house] for undertaking a project,” Baker explains.

“You start to get a general confidence returning and a feeling that things are going to go OK; that encourages people to reinvest in their homes. With the increase in house prices, we start to see fewer homeowners who are underwater with their mortgages, and more households potentially are able to borrow against equity to fund home improvement projects.”

Financing, Financing, Financing

Financing, of course, is perhaps the biggest problem the remodeling industry is facing now. Baker points to a quarterly survey of bank lending officers by the Federal Reserve Board. The survey specifically asked about home equity lines of credit, and in the third quarter most respondents were still modestly tightening their criteria for lines of credit or keeping the criteria basically unchanged. Overall, more were tightening than easing criteria.

The flip side of that question is that demand for home equity loans was strengthening, but not by a lot. Nevertheless, “the bottom line is people were looking to borrow more, and banks were still willing to lend less,” Baker says

“There are some good rates out there,” he says, “but it’s not clear how much money is available. I think banks are still very nervous about lending, and there are still a lot of hoops to jump through if [a homeowner] wants to take out a home equity loan. [Banks] are very cautious about appraisals and what share of the value of the home [homeowners] can borrow against.”