Scenes from the Supershow: Trends in U.S. Remodeling Spending

Nationally, the residential remodeling market has grown for the past two years, and is expected to experience growth in the high single digits again in 2014. When broken down regionally, however, diversity exists when looking at consumer spending on remodeling projects. Of the slightly more than $300 billion in spending in 2013, up to 65 percent was spent on improvements rather than upgrades and aesthetic enhancements. Kermit Baker, director of the Remodeling Futures Program at Harvard University, shared these insights on spending in the residential remodeling market and other thoughts during the 2014 International Builders’ Show in Las Vegas.

Baker moderated a panel discussion including two remodelers, who added their local perspectives on the recession, recovery and the coming year. In reaction to Baker’s opening comments, the remodelers had this to say:

Dan Bawden, remodeler, Houston:

- His business has rebounded in the past two years to a level beyond where it was at the peak of the market in 2007. Growth is not out of control, however, and Bawden now saves for rainy days. He also is anticipating larger profit margins.

- Bawden anticipates growth in 2014 to be between 10% and 15%.

Bill Owens, remodeler, Columbus, Ohio:

- The key numbers when measuring the health of Owens’ business are 90, 15 and 30. Pre-recession, Owens’ average project ticket was $90,000. One year later in 2008 it had dropped to $15,000, and slowly creeped up to $30,000 in 2012. The number is higher now, but still below the peak.

- Not that a recovery in remodeling spending is in full swing, Owens has been asked if he is busy or productive, implying the trick is to remain profitable.

- Like Bawden, Owens is looking for growth in 2014 between 10% and 15%.

- In the Columbus market, Owens says “price is king” as consumers view remodelers and their services as commodities, reinforcing the importance of maintaining healthy margins.

Baker asked Bawden and Owens how their businesses are different now than they were pre-recession.

Owens:

- “We are doing more with less. Our staff is stretched. But our margins have always been good throughout this whole ordeal. We are also kicking out proposals a lot quicker than we have in the past.”

Bawden:

- “We are taking care of our trade partners and our staff more than we have. They’re more important than ever, and it’s important they know they’re appreciated. We started having a party for them once or twice a year.

- “We’re also spending more time prequalifying clients, or disqualifying them, really. We have expanded our client questionnaire on our site, and added a personality test that helps us which clients would be best to work with.

House prices are up on a national scale between 20% and 25% from the first quarter of 2012, after dropping roughly 35% nationally, and up to 50% in some markets, Baker said. Rising home prices are critical to the health of the remodeling market because with increased value comes equity homeowners can use to pay for remodeling projects. One year ago, Baker said, about 25% of the nation’s homes with mortgages were underwater, which has dropped to 12% in January 2014. Owens and Bawden added to Baker’s thoughts:

Owens:

- Inquiries are up, and a higher percentage of those making the inquiries are qualified than in the past. They’re willing to spend, Owens says, because the pent up demand for remodeling work is now experiencing cabin fever.

Bawden:

- Houston is a sellers market, and there has been an increase in whole-home renovations by buyers in the past six months.

Baker asked the two panelists what keeps them up at night these days, but before allowing them to answer Bakekr shared the national perspective based on the research done by his group at Harvard.

- Material supply issues and volatility in material prices

- Continued difficulty homeowners experience attempting to secure financing and credit

- Labor availability, particularly with skilled labor

Bawden shares concern about both the ability to find skilled labor and material prices. He includes clauses in his contracts that state a price is good for a specific time period such as 30 days. He does this to accommodate price changes. “Document price changes and charge clients for the difference. Material price is 100% out of your control so there’s no reason you should suffer for it.”

Owens struggles finding people to hire to keep up with workloads. The struggle is about quality, not quantity, he pointed out. Another issue that keeps Owens up at night is the time it now takes to get permits, which can be up to three weeks. He believes the loss of code enforcement staff due to budget constraints might be the cause of the problem.

Baker ended the panel discussion by outlining three market opportunities remodelers should consider capitalizing upon, including:

- Environmentally sustainable projects, and how much a factor energy prices will be when a client considers energy management enhancements to a project.

- Improvements to the nation’s rental housing stock, which is getting older each year. He noted that the nation’s rental rate is up 35% from 10 years ago.

- Aging in place, although potentially “tricky to go after” holds plenty of potential for remodelers willing to chase that business.

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