Second Quarter Price Updates Released

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On 3/28/2011 we uploaded the most recent pricing data. All subscribers should have received a notification email from RemodelMAX. Some of the pricing trends that RemodelMAX chose to highlight are as follows:

MOST MATERIAL COSTS STAY LEVEL IN FIRST QUARTER OF 2011

  • Dimensional lumber prices increased 5% in most areas, returning costs to 4th quarter 2010 levels.
  • Plywood costs stayed stable increasing only 5% or less in some areas.
  • Shingle costs increased by 5% or more in many areas.
  • Drywall costs continue to stay at historic lows.
  • Fiberglass insulation costs remained level, increasing 3% or less in a few areas.

Here is an enlightening article:

 Harvard Report: Bright Future for Remodeling

By Jonathan Sweet, Editor in Chief
Professional Remodeler

February 8, 2011

(Read the complete report at Joint Center for Housing Studies, http://www.jchs.harvard.edu)

Remodeling may have been hit hard by the recession, but demographics, an aging housing stock and a recovering economy give us plenty of reason to believe the industry is poised for recovery, according to the Harvard University Joint Center for Housing Studies’ biennial report on the industry.

A New Decade of Growth for Remodeling,” released in January, tells us a lot about where we’ve been, but also where the market is headed. We’ve included some highlights of the report, along with explanation from Kermit Baker, director of the Joint Center’s Remodeling Futures program. The complete report is available for download at www.jchs.harvard.edu.
Discretionary projects, improvements take hit

Harvard estimates that remodeling was a $286 billion industry in 2009 – down 12 percent from the $326 billion peak in 2007, but still above 2005 levels and nearly twice the size of the market in 1995. The biggest hit came in the owner-occupied improvement category, though – the sweet spot for many remodelers.

“Maintenance expenditures and rental expenditures didn’t really drop at all,” Baker says. “In fact, it increased to some extent. If you look only at owner improvements, that was actually down somewhere between 20 to 25 percent from peak to trough. That’s what many remodelers are seeing.”

The share of spending on discretionary projects such as kitchens and additions also dropped – from 49 percent of the market to 46 percent, while expenditures for exterior replacement projects gained market share. Work on rental units was also up from $52 billion in 2007 to $54 billion in 2009, compared with a $42 billion drop in spending on owner-occupied homes.

The relative strength in remodeling compared to new construction has also helped the industry become a much more important part of residential spending.

Census Bureau figures put remodeling spending at nearly 70 percent of all residential construction, up from less than 40 percent in 2005. While that level is unrealistic in the long term as new construction recovers, a 50/50 split between remodeling and new construction is realistic, Baker says.

“If you look at it historically, it’s stayed in the 40 to 45 percent range,” he says. “As population growth in the U.S. begins to slow and homebuilding stabilizes … if that was 50 percent on a consistent basis, that wouldn’t be surprising.”
More diverse market means steady growth

While we won’t return to the over-the-top spending of the last decade, the first half of this decade should see steady growth of 3.5 percent a year in the remodeling market, the Joint Center predicts. That’s on par with the market growth in the late 1990s, but well below the 12 percent average annual growth from 2003 to 2007.

“It’s kind of back to business as usual, but not overly accelerating,” Baker says. “I don’t think there were many people who were living through the 2003 to 2007 period that thought this was going to be a normal level of remodeling activity.”

The unsustainable growth of the remodeling boom was driven by a relatively small portion of the population undertaking large discretionary projects. The top 5 percent of homeowners were responsible for about 60 percent of remodeling spending from 2002 to 2007, compared to about 50 percent in the late 1990s and 52 percent in 2009.

“When the market was growing, it was growing because there was a fairly thin slice spending a lot more on home improvements,” Baker says. “Just getting that back to normal implies a different mix of projects.”

That means remodelers probably shouldn’t expect as many of the big-ticket projects as they saw during the boom. Instead, the market will be driven by smaller projects that are aimed at maintaining and improving homes for the way clients live rather than with an eye toward resale. While that may be painful for those remodelers that cater to the high-end client, it’s key to a more stable industry, Baker says.

“It’s better in the sense that you just can’t expect that to sustain itself,” he says. “It was this high-end part that materialized early in the decade and disappeared later in the decade that caused as much cyclicality as we saw.”

Homeowners with household income of more than $120,000 cut their spending 24 percent from 2007 to 2009, compared to a 17.6 percent cut by those with incomes from $80,000 to $119,000 and 20.4 percent of those with incomes between $40,000 and $79,000. Homeowners with incomes under $40,000 – whose spending would presumably be mostly on maintenance projects – only decreased their spending by about 6 percent.

There were also significant differences in spending by age, with older homeowners cutting their budgets much less than younger ones. Homeowners 65 and over reduced spending by only 0.7 percent and those 55-64 cut expenditures 13.8 percent from 2007 to 2009, while those under 55 spent at least 23 percent less.

“I don’t think remodelers are likely to see the volatility they’ve seen over the last five years,” Baker says. “There should be a broader base of households getting involved in this and I
think they’re getting involved in this for more of the right reasons, the right reasons being that’s what I want my house to look like as opposed to I bet I can get a nice return from that project.”
Small companies continue to dominate

The ease of entry into the remodeling market continues to make it a market made up mostly of smaller firms.

Using the latest numbers available, from the 2007 economic census, Harvard estimates there were 650,000 firms that reported receiving the majority of their revenue from remodeling. Two-thirds of those companies reported no employees. Half of those with employees reported less than $250,000 in annual revenue.

That continued fragmentation of the industry makes it difficult to encourage professionalism and adherence to the rules and regulations of the industry, such as the Lead Renovation, Repair and Painting Rule.

Even during the boom years, the industry saw incredible turnover. More than a third of remodeling companies in business in 2003 were out of business by 2007, including more than half of companies that started in 2003, according to Joint Center estimates. It’s likely those failure rates have only increased during the downturn, Baker says.
Foreclosures: Threat and opportunity

The increase in foreclosures and other distressed properties has played a major role in the decline in remodeling. Delinquent homeowners are unlikely to take on any major spending on their homes. The high rate of foreclosures has also played a significant role in depressing home prices. With declining home prices, homeowners are much less likely to invest in their homes or may be unable to because of the lack of home equity financing.

However, as more foreclosures work their way through the system and are purchased, the new homeowners will likely find there is substantial work to be done, especially with the average home spending 500 days in the foreclosure process, Baker says.

“No. 1, you could assume almost no investment in that property from the time that the household decided it really couldn’t afford that anymore and No. 2, there’s a lot more time for vandalism or anything to occur if it’s just sitting empty with no one really caring about it,” he says.

Harvard cites a spring 2010 study from the Home Improvement Research Institute that found that buyers of distressed homes spent, on average, 15 percent more on home improvements in the first year of ownership compared to other buyers. Most of the homes in that study were short sales, Baker says. As more foreclosures go on the market, that difference is almost certain to increase. “The level of distress for those properties is not nearly what we’re going to see when this wave of foreclosures comes through,” he says.
(Read the complete report at Joint Center for Housing Studies, http://www.jchs.harvard.edu)

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