Exclusive: Interview with Kermit Baker, Harvard University

Qualified Remodeler interviewed Harvard’s Kermit Baker about the 2014 residential remodeling market. Baker is senior research Fellow at the Joint Center for Housing Studies and the project director of the Remodeling Futures Program. Following are excerpts from the interview.

 

Growth in 2013, 2014

We see strong growth in the first half of the year and it will taper a little through the second half, but we will end the year with growth in the low double digits. It’s going to be a good year in 2014. It’s a year when remodeling will be back to its market high, and we will gain everything back that we lost in the downturn. A comparable year for home building will be 2016, 2017 or 2018 when it’s back to long-term trend levels. We’re also guessing that end-of-year growth for 2013 will be in the double digits.

 

Material supplies

In terms of supply constraints, that’s a concern throughout the construction industry, certainly in homebuilding and to a lesser degree on the remodeling side. Those concerns were stronger six to eight months ago when the market was moving faster than it is now.

 

Consumer confidence

Consumer confidence is heavily correlated with the economy and specifically employment. The economy has come back slowly and there’s always the fear that if it continues growing slowly it could tip over into decline. We don’t see many external forces out there that would convert slow growth into decline, though. The longer the slow growth continues, the more difficult it will be to reverse it into decline.

 

Lead paint

Ultimately the lead paint issue is a costing issue. Contractors have told me that more and more firms are walking away from projects if there’s lead paint to deal with, but others have said that lead paint removal will be a lucrative niche moving forward for anyone willing to specialize in that work. Lead paint is a good example of when it makes sense to specialize, because those firms will know how to do the work efficiently. One of the problems in this industry is most small firms think they can do anything, and that’s not the way it should be.

 

Market opportunities

There are three remodeling market niches we think offer the best opportunities for growth, and they’re not traditional. The first is sustainability as it relates to home improvements. The second is the rental stock, and the third is aging in place.

 

Sustainability

Sustainability was the strongest niche during the downturn in large part because of the big tax credits associated with that work. It was an easy decision for homeowners to make because of that, coupled with growing energy costs. Moving forward, it’s undetermined how successful it will be. It took a decade for folks to get serious about fixing a cold house rather than suffering within it by turning down the thermostat and wearing sweaters in the house, and to say ‘let’s make improvements to the house for better efficiency.’ And now that I’ve read that energy costs will begin to slide, who knows what that’s going to do in terms of strong programs like Energy Star. Will people see the financial return on the other end? Should they spend the money? The story here is not about doing good for the world, it’s about whether it saves homeowners dollars and cents. Sustainability is the strongest home improvement market. Efficiency investments have driven a range of other remodeling issues like healthy homes, water conservation, materials use and alternative fuels. You can even make an argument that the home technology market has been triggered by issues such as efficiency and energy utilization.

 

Rental market

The rental market has been ignored for the past 10 years. Not many rental units have been built or have had improvements done. In many markets during the boom, home prices have gone through the roof as rents were declining. As a result not a lot has been put back into the rental units. The problem is, a traditional remodeling firm doesn’t think of the rental market as an expansion opportunity. I think for the single-family or duplex rental market those buildings look a lot like what remodelers are familiar with so maybe that would be an easier transition to make. Remodelers aren’t finding a lot of work with garden apartment-type units. That type of work goes through different channels, and the remodeler doesn’t know how to market for that client base.

 

Aging in place

We see a lot of pushback from the aging-in-place market. Contractors are not always as good about talking to consumers about this issue, because it won’t be relevant to clients for 10 or 15 years, and remodelers don’t want to depress their clients. However, a lot of work has been done by Baby Boomers or pre-Baby Boomers, and remodelers can easily make that sell. I can remember talking to remodelers decades ago about offering financing, and they did not want to offer it because they didn’t want to confuse their clients about what they do. That changed, so maybe that will change with aging-in-place, too.

 

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