Positive Outlook Emerging for 2014

Since the beginning of the Great Recession in 2007, people have been hanging on, speculating on when it would end and waiting for word that the worst was behind them. According to market analysts and economic indicators, that time may finally be now.

According to the National Association of Realtors, unemployment rates in 2011 of 8.9 percent are expected to drop to 6.9 percent in 2014. The Stock Market is also recording record highs, and consumer confidence is climbing as a result.

While this is good news, things have not completely returned to normal, whatever “normal” is these days. For many industries hard hit by the recession – including the home building and remodeling sectors – the old “normal” will likely never be seen again. The bubble in the housing and remodeling segments that was celebrated through 2006 is not expected to return.

But, that doesn’t mean that a recovery in housing and remodeling isn’t taking place. Both areas are again scoring double-digit gains, and 2014 is promising to be a positive year. Property values are rising, and the ability to borrow money to finance remodeling projects will continue to ease.

 

On the Home Front

Housing starts were projected to be up significantly in 2013 – expected to see a gain of about 20% over 2012 levels. Expectations for 2014 are that gains will be 22.8% over 2013. According to the National Association of Home Builders, total housing starts were 783,000 in 2012, 921,000 in 2013 and are expected to come in at 1,147,000 in 2014.

These numbers certainly appear to be very strong, notes Kermit Baker, senior research fellow at the Joint Center for Housing Studies of Harvard University. However, he cautions, “We’re coming off such a weak base, not everyone is totally impressed.” Starts of just over 900,000 in 2013 are still considered low by historical standards. “It used to be that if we didn’t hit one million starts, we were in the trough of a deep recession. So, it’s all relative,” he says.

Still, after what has happened in the building industry since 2007, the latest projections are welcome. “Twenty to 25 percent growth in 2014 will take us up somewhere between 1.1 and 1.2 million starts – a healthy number, but still well below where most people believe we should be in terms of the trend line. We’ve historically had starts in the 1.6 to 1.7 million range,” reports Baker.

While conditions are improving in the major key areas – unemployment, consumer confidence, property values – they are still not strong enough for many to make the leap to home ownership. This is especially true among the younger generations who have yet to buy their first homes.

Household formations have historically been a key driver of home building demand, and those numbers are still weak. While those numbers traditionally range from 1.1 to 1.2 million per year, current statistics show that the range is between 600,000 and 700,000 right now. Many millennials have been unable to find work that pays enough to establish their own households, keeping them in their parents’ homes for longer periods of time. Of course, the drag on household formations is also affecting existing-home sales, up about 10 percent in 2013 over the previous year, yet still a depressed number historically.

Until there is more job growth, Baker acknowledges, household formations will not increase. “We need household formations to create housing demand,” he stresses. “So, it’s all triggered by how healthy the economy is.”

 

Remodeling on the Rebound

The remodeling market didn’t get hammered nearly as hard as home building did during the Great Recession, when housing starts dropped from over 2 million in 2005 to down to just over 500,000 – a loss of 75 percent.

For home improvement, it was 15 to 20 percent peak-to-trough downturn, according to Baker. As a result, the climb back up has been less steep, and the news is good going into 2014.

The home improvement market is likely to be back to its 2007 high by the end of 2014, notes Baker. “We’re expecting pretty healthy growth, probably at a double-digit pace, through a good chunk of 2014. So, we think we’ll be back to $325 billion, which is where we saw the peak of the market back in 2007,” he reports.

“With remodeling in general we’re seeing good things happening,” reports John A. Petrie, CMKBD, president, National Kitchen & Bath Association and owner, MH Custom Cabinetry in Mechanicsburg, PA. “We’re seeing improvement, and I think it all boils down to consumer confidence.

“People are feeling more comfortable and believe now is the time to invest back into their homes,” he continues. “They’re making that investment because home prices are improving, the value of their home is gaining back what it lost.”

Baker notes, however, that the composition has changed since 2005. “A lot of the remodeling boom was driven by upper-end projects – such as the $75,000 kitchen remodel or the $50,000 bath remodel. Things like that were unusually strong during the 2003 to 2007 period, and that was driven by the appreciation in house prices,” he remarks.

Today’s contractors are reporting that they are doing more projects each year for the last three or four years, but the size has been smaller. And many kitchen and bath dealers and designers have reported that the majority of their jobs during the downturn were baths. Indeed, bathroom remodeling was down only mildly during the recession, according to industry professionals.

One cause of that may simply be the nature of the room. “When bathrooms need to be remodeled, oftentimes it’s because there is a leak and water is causing damage,” Petrie observes. “If you have to rip out the tub, you have to tear out the wall surround, and probably part of the floor. At that point in time, you’ve remodeled half of the bathroom, so you just upgrade the rest.”

Kitchens, in general, however, are a discretionary item. “If things are not great and you have a kitchen that works, you use that kitchen,” remarks Petrie. “What we saw [as we moved into] 2007 and 2008 is that, instead of remodeling the kitchen, if the dishwasher broke, that’s what was replaced.”

While the upper end is expected to come back, it’s not expected to return to pre-recession levels. Because financing remains difficult to get and housing prices aren’t going up the way they once did, households are less inclined to do upper-end projects. In fact, Petrie notes that consumers are relying much more on cash now, which makes budgets much more firm.

“The projects that will come back first will be at the middle of the market, and probably more product by product replacements rather than ripping out the kitchen to the studs and starting over again,” Baker stresses.

But Jeremy Edwards, lead analyst with market-research firm IBISWorld, notes that the home price index is trending upwards – most recently 11.2 percent from Q4 2012 through Q3 2013. And that will translate to people being more willing to invest in their homes, because improving the value of their homes is one of the key drivers of remodeling.

 

Discretionary Markets

Though the discretionary market – kitchens, baths, room additions and such – may be slower to come back than other segments, demand is definitely rising. And, unlike the past few years, many jobs being ordered are not piecemeal and patchwork.

“People are looking for full remodels,” stresses Petrie, “and are now improving their kitchens for how they use them. This often means redesigning the space, not just upgrading the items. They’re not just changing items to upgrade them, people are actually remodeling to improve the space and environment.”

Among the major drivers for kitchen and bath remodeling in the coming year are some old stand-bys – open-style kitchens designed for entertaining, energy efficiency and the need for upgrading old, outdated designs and pieces.

One of the biggest up-and-coming drivers is the increasing interest in aging-in-place. As the population ages, there is an increasing need and corresponding demand for homes to be retrofitted with items that provide greater functionality, easier access and minimal maintenance.

“Aging-in-place is going to be strong, and we need to be able to design for that older generation to be able to meet their needs,” notes Petrie. “Ovens that need to be strategically placed so you can get into it from a wheelchair, raised dishwashers, curbless showers and wider doorways are just some of the elements that will be considered for designs.”

While many newly constructed homes take accessibility into account by providing easy-to-reach appliances, more open work areas and wider hallways, many consumers interested in the concept of aging-in-place design do not live in areas where new construction is an option, such as the Northeast and the Midwest.

“A large share of 65+ households that want to age in place have very little new construction to accommodate their needs, and live in an area with an older housing stock that’s really much more hostile to this population,” notes Baker. “These homes tend to be more vertical, have smaller rooms, smaller doorways, smaller hallways, more steps and things like that which can make it difficult.”

Additional trends will continue to emerge as the next generation steps into its role as homebuyer and remodeler.

“This group doesn’t want what they grew up with,” explains Petrie. This group lives differently and entertains differently.”

One possible trend for this group is their interest in living and cooking a little healthier, observes Petrie. “I have more requests now from this generation for steam ovens than I do microwave ovens.”

Stay tuned.

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