Looking Good

Remodelers, in conversations with QR, have noted an increase in projects that are self-funded by homeowners. “That’s always been true,” Baker says. Remodeling is an industry “that for some reason doesn’t rely on a lot of financing or a surprisingly low share, but the share that has used financing has been going down in recent years, and the No. 1 reason is banks are hesitant to lend. Secondly, homeowners are hesitant to borrow. A lot of folks don’t want to put their house at risk by borrowing against the equity and risking another downturn after all of the foreclosures they’ve heard about,” he says.

Cash on the Barrelhead

As a result, Baker explains, more and more homeowners are saving to pay cash for home improvement, and it makes them more price sensitive. When projects were financed by a home equity loan, upselling might mean an extra incremental payment of $50 a month, but with cash it could add an extra $2,000 or $3,000 to the bottom line immediately. “I think owners are just unwilling or unable to go that distance now,” Baker says. “The [homeowner’s] budget is pretty firm, and [remodelers] had better figure out a way to come in within that budget if they want to get the job.”

Although financing remains an obstacle to recovery, other factors that broadly affect the U.S. economy could put a stick in the spokes of recovery, too. As of this writing, the much talked-about “fiscal cliff,” and the possibility of negative growth numbers if that cliff is not circumvented, still looms as a worrying scenario. “That could be a very, very serious problem in terms of continuation of the trends that we have been seeing,” Baker says.

“The recovery of the housing market,” Baker continues, “is predicated on things getting somewhat better in the broader economy. I don’t think we need to have an unemployment rate of 5 percent; I don’t think we need to add 250,000 jobs a month; and we don’t need GDP growth of 4 to 5 percent to keep [the current trend] going — but we need all of those to be at least preceded by a plus sign rather than a negative sign.”

An economic reversal would bring back some of the problems we thought we had made progress in resolving, such as the number of distressed properties, Baker notes. “If those [numbers of distressed properties] start to climb again, it would start to depress house prices; we’d start cycling back down, and that would start limiting mobility.”

Distressed Opportunities

Distressed properties, incidentally, represent a significant potential for remodelers. “We’ve estimated that close to $10,000 a unit is spent on repairs and improvements to get those homes back in the housing inventory,” Baker says, adding that in 2011 an estimated $10 billion was spent nationally renovating distressed properties.

Another bump in the road to recovery may have to do with labor availability as growth in home building and improvement continues. “I do think that we’re likely to run into some labor issues fairly soon —and probably earlier than we might have expected. A lot of remodeling contractors went out of business during the downturn, but I think what happened is a lot of custom builders backfilled into the remodeling market. It didn’t look like a labor shortage in any sense because we had those builders going after some of the upper-end remodeling projects. But I think they will go back to new home building [as the market improves] because a lot of their competition went out of business. It’s going to be easier pickings for them back on the home builder side.”

Younger people, Baker says, don’t see remodeling as a desirable career path, at least in part because of the cyclicality of the construction industry that routinely leads to periodic unemployment as the economy goes through normal recessions. “I think it could be a problem trying to rebuild this labor force,” he says.

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