Market Memo

ARLINGTON HEIGHTS, Ill. — Dec. 15, 2008 — As the president-elect Barack Obama today introduces his energy team, discussions about the new administration’s proposed stimulus package have begun to take shape. Beyond substantial funding for infrastructure projects, there is also talk of greater funding for rebates and low-interest loans for home-enegy retrofits.

According to Larry Zarker, president of the Building Performance Institute, officials with the Environmental Protection Agency, the Department of Energy as well as various independent agencies like the Alliance to Save Energy are working with congressional leaders to ensure that the huge stimulus package broadly outlined by the president-elect includes elements that will go toward home renovation.

One source told QR’s Market Memo that there are proposals on the table that would provide as much as $4 billion for these programs. No timetable for a final package has been set forth, but there has been some speculation that Congressional leaders hope to have the overall stimulus bill ready for the new president to sign when he takes office on Jan. 20.

ARLINGTON HEIGHTS, Ill. — Dec. 12, 2008 — Released yesterday in an arcane Federal Reserver report were numbers indicating that the Amercians reduced their level of household debt during the 3rd quarter. Most remarkable is that it appears that this is the first time in 50 years that this has happenend, reports the housing Web site AHN.

The Fed’s “Flow of Funds Report” for the Q3 showed an annualized drop of .08 percent in U.S. household debt. The good news: Americans are getting their financial house in order rapidly. The bad news: there is still a very long way to go before Americans can compare favorably with the savings rates experienced by other leading Western industrialized nations.

Economists who worry about the U.S. heading into a Japan-style quagmire that began in 1991, will see evidence that the U.S. is heading down the same road. And that is a rocky road indeed. Japan’s consumers only recently began spending their money again. While it is way too early to tell if this situation lies ahead for us, reducing debt is certainly needed and, in the long run, good for the economy, the housing market and remodeling activity.

ARLINGTON HEIGHTS, Ill. — Dec. 5, 2008. The news from the economic front has been so relentlessly negative over the past six weeks that even the most pessimistic among us begins to wonder if this “recession/depression” has been oversold. This is not to say that we don’t all face some very real shortfalls in leads and business this year, but at some point, you wonder if this might be a negative bubble.

There is at least one piece of EXTREMELY positive news  coming out of Washington from the same officials that are managing the $700 billion TARP fund. There is a proposal to offer lower mortgage rates to the tune of 4.5% on all NEW purchases of homes. This could do a lot to release pent-up demand. One estimate is that as many as 1.5 million to 2.0 million residential transactions could be stimulated by such a move.

 Here’s why I love this idea and why most remodelers should love the idea too.

1. The primary driver of remodeling activity is existing-home sales. The number is estimated to drop to 4 million units for 2008. Think of what existing-home sales would do if the 4.5% mortgage program hit the streets in January or February next year. Given the previous estimates it is not out of the question to see existing-home sales bump back up to 5 or 6 million — a level that drove some of the go-go remodeling years of ‘04, ‘05 and ‘06.

2. It helps reduce the backlog of unsold homes, which now stands at an 18 month supply.

3. It would shock consumers back off the sidelines.

4. It would allow people who are in danger of losing their homes to find a more affordable way to house their family.

5. It puts the government remedy for this financial crisis where it all started, the housing industry.

Let’ me know what you folks think. Please leave a comment on the blog.

Also, I want to thank all of you who have joined the Qualified Remodeler Magazine group on LinkedIn. We’ll be using it to send out the latest relevant information about the remodeling market that have. This will often come on a daily basis. To join our LinkedIn group click on the preceding phrase or go to http://www.linkedin.com/e/vgh/1428097/.

That is all for now. Feel free to contact me directly at patrick.otoole@cygnusb2b.com.

Mark Richardson, CR, a newly inducted member of the Remodeling Hall of Fame, recently talked about the way that his team at Case Design & Remodeling are approaching the slowdown in the remodeling market. He says that in 2008, the sales people in his firm that experienced the best success were those that sold projects based on what the house needed, not what the homeowner desires.

In the past several years, most projects were sold as a function of homeowner desires. According to Richardson, the focus now is on giving the house what it needs to perform best for its owners. I think there is a lot of wisdom in this approach. First, we know that people are preserving their cash during this downturn. At the same time, many have an impulse to protect what is, in many cases their largest asset. Second, the average age of the American home is 32 years and rising. A sales person armed with detailed plans on how to make a home perform better and flow better for its occupants over the long haul will have a better chance to make the sale.

BOSTON — As I write this post, I am on the campus of Harvard University, where tomorrow, the Remodeling Futures Steering Comittee will release its latest data about the remodeling market. The news is not expected to be rosy, but I sense a silver lining on the horizon.

Back in the spring, the outlook was trending poorly for American consumers and for the U.S. economy generally. Since that time, particularly in the last few weeks, we’ve seen unprecendented levels of market decline due to global credit and banking issues. The situation has gotton worse. I am hearing that the speed of our decline may actually be a good thing. At the last meeting of the of the RFSC six months ago, Kermit Baker and other Harvard Joint Center experts opined that the quicker the economy gets to the bottom, the sooner that we’ll begin to see a turnaround. And, given all that has happened in the past six months, it is hard to image a quicker race to the bottom, economically speaking.

The key concept relates to consumer sentiment and market sentiment: If we think we are at bottom, only then can the market re-set and begin to climb again. Economist Robert J. Samuelson wrote about the same phenomenon in today’s Washington Post.

A dozen years ago, James Grant — one of the wisest commentators on Wall Street — wrote a book called “The Trouble With Prosperity.” Grant’s survey of financial history captured his crusty theory of economic predestination. If things seem splendid, they will get worse. Success inspires overconfidence and excess. If things seem dismal, they will get better. Crisis spawns opportunities and progress. Our triumphs and follies follow a rhythm that, though it can be influenced, cannot be repealed.

My theory, is that six months from now we will all look back and point to this period before the general election, with all of its unrelated financial turmoil and say that this was indeed the bottom from a purely market-sentiment perspective. Yes. there will be a continued fallout from what has happened: job losses etc. But every step forward from this period will be up instead of down. And by the 3d quarter next year, the current lack of certainty will disipate and remodeling will once again grow.

In May, the Census Department published the final quarterly numbers estimating residential alterations and residential repairs. After 40 years, the C-50 report, which was often subject to many revisions and proved to be unusually volatile, was cancelled. But for all of its short-comings the C-50 report was the best we in the remodeling industry had as a benchmark of activity. By federal government standards, the C-50 was not a very costly program to run — about $1 million annually — but it had been under threat for cancellation many times in the past. This past fall, the C-50 appeared to have been saved from the cutting block after last-minute lobbying heroics put forth by prominent members of the industry. But, by the time of the spring meeting of the Remodeling Futures program rolled around on April 15, the die had been cast and the program had been irretrievably lost.

This is problematic however, because the C-50 report, had been the backbone of Harvard’s Remodeling Activity Indicator and more recently in the Leading Indicator of Remodeling Activity or the LIRA.  There is talk of development of an improved report from Census, but because of the lead time needed to get approvals, build research models, gather the data, and tabulate the data before any research is compiled, the earliest such a new report would be released is several years from now. Until that time, researchers are looking elsewhere within government reports to try to collect a similar set of data.

A fix for the LIRA was found in another government report on construction, the C-30. It reports on residential alterations, but not repairs. As a result, Harvard was able to keep the LIRA going with minimal change to the efficacy of the results, but the maintenance and repair component of remodeling activity will not be represented.

Discretionary remodeling (alterations) are hugely important to remodeling, but as the housing market slows and the number of homes sold each year slows, the importance of maintenance and repair as a sector of remodeling is set to take on a renew prominence in the market. It is a shame that an industry as large as remodeling ($290 billion) has such a dearth of government numbers, while home building and other sectors are well tracked.

Good news for everyone associated with the housing industry, including remodelers, came today when the Senate reached a compromise to move forward on a bill that will limit the default mess to the tune of $500 Billion. 

If enacted, Fannie Mae and Freddie Mac would create a fund that would allow distressed borrowers to get financing through the fund. The size of the bailout and the government backing of the program should give lenders the confidence they need to work with the tens of thousands of U.S. homeowners who face default.

Will it be enought to shorten or reduce the depth of the housing downturn, only time will tell, but it is a promising step in the right direction agree many reports. You can link to them below.

The Washington Post

Reuters

The Federal Housing Finance Regulatory Reform Act of 2008WASHINGTON, DC – Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, today announced that the Committee passed “The Federal Housing Finance Regulatory Reform Act of 2008,” legislation which includes major efforts to help prevent the rising number of foreclosures, to create more affordable housing for Americans, and to reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system.  The legislation passed by a vote of 19-2.  A summary of the Manager’s Amendment is attached.“The passage of this bipartisan legislation marks tremendous progress in my ongoing effort to help stabilize our markets and provide relief to hundreds of thousands of Americans who, due to no fault of their own, are struggling to keep their homes,” said Dodd.  “By creating a voluntary initiative to help distressed borrowers refinance their mortgages; establishing a new fund that will help create more affordable housing for millions for Americans; and reforming the GSEs so they are better able to fulfill their mission of providing affordable housing options, this bill addresses the root of our current economic problems – the foreclosure crisis – and takes a step in the right direction toward getting our economy back on track.  I look forward to working with Senator Shelby, Majority Leader Reid and Republican Leader McConnell to bring this bipartisan legislation to the Senate floor.”“I believe the Banking Committee today sent a strong message about the importance of protecting the American taxpayer,” said Shelby.  “This legislation adheres to that principle in creating a strong and flexible GSE regulator, and by ensuring that taxpayer dollars are not used to fund the Hope for Homeowners program.  Today’s action is evidence of the tremendous progress we can make when we work together.  I look forward to working with Chairman Dodd, leadership and the rest of my colleagues as this legislation moves forward.”

Qualified Remodeler readers are well acquainted with our feisty, well-reasoned and unabashedly opinionated “On Your Business” columnist Mike Weiss, CGR, CAPS, GMB. Well, a recent Weiss column regarding the need to join an association (NAHB Remodelers or NARI) as the best way to any improve remodeling business, led to a spate of letters and e-mails from readers.

One reader, a well-regarded remodeler in the central Michigan area wrote back to tell the reason why he won’t join the local association — several members on the board of the association, he said, were known slow-pay, no-pay type of operators within the business community.  He even accused some of them — with their deadbeat ways – of directly contributing to the recent demise of a local supplier.

I have changed the names to so as to not cast aspersions on the good guys, but his allegations and Weiss response follow in this post.  It is thought-provoking reading. Weiss argues that there are bad apples everywhere, even in the HBAs and local NARI chapters, but that does not dimish the overall good that is done by the associations.

Mr. Weiss,

I am sending this email to get some understanding about the reasoning behind your push for builders and trade contractors to become involved in their local HBA’s.

First, let me introduce myself. The primary focus of both of my businesses is residential remodeling. Customer service is the most important part of my business. The integrity that I hold to a higher standard is shown in the relationships that I have with customers, suppliers, subcontractors, and other trade professionals. I have been in business for 19 years. And in a tough economy, I am scheduled out at least six months.

Recently, a friend of mine who was also a window supplier for my building company went out of business as of Dec. 31, 2007. The reason for this is the morals and ethics that some of the builders in the Xxxxx, Mich. area possess. Three years ago, a lumber yard in (our area) went bankrupt because of these same builders.

What, may you ask, does this have to do with the HBA? Good question. I am glad you ask.

Recently, when my friend told me that he was closing because certain builders did not believe in paying their bills, he told me that he had talked to the director of the (local) HBA and he asked her what he could do considering that most of the dead beats belong to the (local) HBA. She told him to write a letter detailing who and how much and she would forward the letter to the HBA board. His concern with the whole letter issue is that two of the dead beats are board members. The former owner of the lumber yard had written a letter to the HBA board and received no response for obvious reasons. So far Mike, what I have seen of the HBA operation,  at least in Xxxxx, Michigan is that if you can pay the membership dues they will tell the whole world that you are honest, trustworthy,  knowledgeable, and that your morals and ethics are of the highest standards.

Now, I can tell you that if you stacked up all of these so called qualities that are accepted and promoted by these HBA’s those things would compare to the pile my dog leaves on my lawn every day. The sad truth of this is not how many businesses will fail for trying to be honest and fair, but how many people (i.e., the general public) will get screwed by so called honest, knowledgeable, and trustworthy contractors. I thought the HBA’s of America are supposed to be a source for potential customers to find contractors that won’t rip them off.

 

Sincerely,

 Michigan Remodeling Company Owner

Weiss’ response:

Sir,Yours is certainly not an easy letter to address other than to say I would have reacted the same way.  I took a tour of both HBA websites and they indeed boast of ethics, professionalism and more.  I know that much of Michigan is under enormous pressure economically and that there are business failures where no one is at fault.To take the purist’s side, during times such as these, it’s prudent to watch those bad customers closely when it comes to receivables or to put them on a COD basis with old debt being chipped away at.  Sometimes suppliers keep on selling because they think they need the business, equating the sale with cash flow.  I’m not making any excuses for the credit bums because every community has them much as we have clients occasionally who are the same.I’ve had suppliers of mine bitch about someone not paying their bills and my retort has always been the same - if you keep selling to them when they don’t pay on time, you are indirectly charging me for some of their delinquency.  I have actually threatened them with losing my business if I find the bad ones are getting the same price I do when they don’t pay as agreed and I do.If we as industry practitioners don’t band together for our best representation even though we have some (too many) bad actors we are left defenseless against anti-builder/remodeler legislation and regulations.  I agree it’s hypocritical to admit members whose background is questionable and I would like to think my local has very, very few but one is too many. There’s no excuse for what has happened and if the bad actors stay in business, it’s at the expense of those suppliers who keep going back for more bitter medicine.  This may sound goofy but in my local, those associate members who are active and participate in local governance have less deadbeat builders for customers because they know who they are and just either get paid or pull the plug on them.Every prudent business plan should provide some allowance for bad accounts, we all have them.  You’re still in business because of your ethics and reputation sure, but my guess is also that along with reading the trade publications you are a pretty good shepherd of your receivables, you don’t take jobs that you know are shaky without a much tighter tolerance - that’s not being a hard ass it’s being a pro.HBA’s and the NAHB are not perfect - but without them, there would be no good way to draw attention to the bad apples as you have tried to do.I know this discussion hasn’t helped much if at all - I wish I had the solution for the problem but of course I don’t; if there is one.  The closest thing to the fix is to do what you have done and to draw attention to it and to keep on doing it.  The last line of your letter is true but only so because of the demand and enforcement of the members - it is not a staff function.  The answer may be to run for the board or back someone who will raise the issue until it is addressed.  That takes time but it works.Thanks for writing - thoughtful letters like yours are what I care very much about and I am complimented that you have taken the time to read my column - I hope you will continue to and write about your concerns and issues.Sincerely,

Mike  

The release today of the Case-Schiller house price index for December 2007, has further exposed the soft underbelly of the American Economy and to a lesser degree, the market for professional remodeling services.

The link between home equity – now standing at around $10 trillion across the130 million homes in the U.S. — and remodeling is well established. It is estimated that 30 percent of all cash-out refinancing is used for home improvement. So it goes without saying that house prices fall there is less available for improving homes.

A second effect of lower house prices is a reduced asset value to protect. A house appreciating at 10 percent per year might stand to get a better quality roofing, window or siding product versus a home that has leveled off in value.

At the recent Winter Board of Director meetings of the NAHBR, I asked respected economist Gopal Ahluwalia where he thought house prices might end up in 2008. I cited a Federal Reserve study that showed an imbalance between house prices and rents of 20 percent.

Ahluwalia’s response pretty much summed up the guesswork involved in this: “If I could tell you how much house prices were going to fall in 2008, I would certainly be working somewhere else.”

ORLANDO — The largest residential construction industry trade show, The International Builders Show, just completed a four-year run in this city on Feb. 16. Having attending this show annually since the late 90s, I can say that the show certainly reflected a slower housing market generally, but it was not as slow or down as one might have expected. The National Association of Home Builders, which owns and operates the show, says attendance hit 92,000. This was not near the record of 110,000, but all-things-considered, it was nothing to sneeze at.

Exhibitors that I spoke with at the show were generally pleased with the traffic of builders at their booths. Many said that the energy was not as frenetic as shows held immediately preceding this one, but there was a calm professionalism among attendees, many said. I was struck by the number of times I heard this remark — ‘the numbers were down a bit, but the quality was better.’

This makes a lot of sense to me. During the go-go days of ‘03 to ‘06, the market seemed frothy with a lot of inexperienced players clamoring to get a piece of the action. Many of those players did not have the level of business to weather the current housing storm. One can surmise that those players did not have the budget to attend IBS ‘08 or that they have simply gone away.

When you talk to remodelers and builders who’ve been around awhile, they always say that one of the benefits of a market downturn is that it helps weed-out the poor operators and strengthens the survivors. It is akin to a fire in an old-growth forest. The fire sweeps through and kills the underbrush, leaving more light and water for the established trees.

Why IBS Was Better Than Expected

IBS ‘08 was better than expected precisely because the residential construction industry is primarily comprised of small, locally owned firms, many of which have been around for generations. This is certainly true on the remodeling side of the business where full-service remodeling firms seldom get larger than $15 million in revenue per year. This despite the fact that professional remodeling activity associated with owner-occupied housing hit $187 billion last year. It is an extremely fragmented market.

On the new construction side, things are a little more consolodated, but there are still thousands of local players that comprise more than half of all home completions each each year. The top 400 builders produced roughly half of all new homes during this decade. But those operations have been particularly hard hit by the downturn in the market. These top 400 production home builders are where many of the building product manufacturers focused their sales and marketing energies in recent years, so when the downturn hit, the top 400 were particulary exposed. Many top building materials suppliers took a big hit as well and several chose not to exhibit at IBS for the first time in many years.

An argument can be made that downturns in housing, like the one we are experiencing now, help bring the industry back to its roots, the small-volume, diversified builder and remodeler. Collectively these firms represent the backbone of the industry and this was extremely apparent in Orlando — 92,000 attended despite the gloom and doom of media reports.

The lesson is this: the industry is far healthier and more resiliant than anyone could have expected.