Market Memo

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.

The sharp growth in remodeling activity over the past 10 years has been due in large part to the enormous growth in discretionary remodeling spending.

Discretionary remodeling encompasses the sexy part of the remodeling market — the huge whole-house remodeling projects, the luxurious kitchens and baths — that have been so prevalent in recent years. In some respects, upscale projects and other elective projects have fed a “Houses as Bling” mentality. But there was much more than mentality driving the growth of these jobs. It was based on strong consumer confidence. And that confidence was based, to a large degree, on the growth in value of personal assets, particularly the value of houses.

In many places around the country, a home purchased in 1996 very likely doubled in value by last year. This not only increased the net worth of millions of Americans, it also made them feel richer. With house prices rising year-after-year, there was a willingness to tap that equity and spend it. But last year, as we all know, the housing market shifted. House prices began declining in many places. And it has thrown a wet blanket on consumer confidence and discretionary remodeling spending.

Where are house prices headed from here? It depends on who you ask.

The Federal Reserve put out an authoritative study of house prices historically as compared to rents. The study concluded that even with last year’s housing price declines nationally, an imbalance of up to 15 percent still lingers in the market. In other words, look for house prices to decline up to 15 percent more during the ensuing months. The speed at which those prices decline is of critical importance, say the experts. A quick pullback will allow the market to “re-set” and begin to move up again. A longer timeframe of two or three years might actually be worse for the housing market, some argue. That would post-pone market re-set and prolong the period of uncertainty that the housing market is currently experiencing.

Thankfully, the remodeling market is not comprised entirely of discretionary activity. The bedrock of the market is comprised of necessary work — maintenance and repair. There are approximately 130 million homes in the United States. Their average age is over 31. As these homes age, maintenance, repair, renovation and remodeling will be required. And no matter how consumers feel about the value of their portfolios, work that needs to be done usually gets done. Homeowners must protect the value of their asset. That is why remodeling tends not to slow down as much as new home construction during housing downturns. There is a huge base of ready business. This year, instead of getting calls for $100,000-plus room additions, the calls will likely be more moderately priced and more needs-based.

CHICAGO — The focus of the annual GreenBuild conference held here earlier this month was primarily commercial building and remodeling, but the number of additional attendees 22,500 vs. the expected 18,000 is a sign that “green” has reached critical mass. It has gone from a discretionary endeavor to a must-do.

In 1999, I remember attending the NAHB Green Building conference. At the time, all of the possibilities of a green were opening up to builders and remodelers, yet relatively few took the time to roll up their sleeves and invest in going green. What was missing then was consumer demand, a pull-through.

In the late 90s, few saw the business sense of going green, because it was a.) more expensive, b.) not being requested by homeowners. The primary difference between then and now, is that green has matured, but also a confluence of larger global issues have put green front-and-center in the eyes of the American public. The surge in attendance could be seen as a fear-factor. Some builders and remodelers are playing catch-up and don’t want to lose jobs for lack of fluency on matters of green.

If you are a remodeler and you want to be a part of the green movement, and it is a movement, there is no need to panic. Much of what you already do is very green. Here are three items to point out the next time your prospects or customers ask.

 1. You remodel.
Instead of building new homes on farmland, or tearing down and sending tons of building materials to the landfill, you take what is there and adapt, re-use and recycle.

2. You increase energy-efficiency.
Many remodeling projects involve windows, roofing and siding. Today’s materials have very high thermal ratings. When you wrap a house and install new windows, you are engaging in the No. 1 item on all green remodeling checklists.

3. You encourage water-saving.
Every time you put in a new kitchen or bath, you are in a position to install a low-flow toilet or a more efficient faucet or showerhead. Reducing the use of water is an important green objective.

To truly take advantage of the green movement, you will need to quickly move beyond these basics. You will need to get training for you and your team. NARI and NAHB both have education and certification programs that will prove very helpful to this end.

You will also want to get involved with green at the local level, Austin, Tex., Portland, Ore., and Colorado already have green certification programs up and running. Doubtless, many other areas of the country have programs as well. Another place to start your green quest is the US Green Building Council’s new Web site for green residential, www.greenhomeguide.org.

As you pursue gaining a better understading of how your remodeling firm can go green, take your time. Do your research. Pick a strategy. And, above all, do it with the knowledge that remodeling is inherently green.

LAS VEGAS — The Wynn Hotel served as an excellent backdrop for the Qualified Remodeler annual awards night held Oct. 9. Three hundred-plus award winners and guests attended the event, which featured music by Ken Kanline, as well as top-notch food and drink.

Ken Kanline got the evening started with an excellent rendition of “Big Time Remodeler.” Ken, who owns the Southern Building Show and the Chrysalis Awards, is also a great musician and song-writer. Anyone who has attended his Chyrsalis Awards program knows first hand the power of his voice and guitar playing.

From there, the program highlighted the achievements of the Top 500 “Top Performers.” Among the companies present to receive their awards were: Larry Judson and his team from K-Designers, Gold River, Calif. K-Designers is No. 5 on the 2007 Top 500 with $63 million in remodeling revenue. They were the Top Performer in the siding category.

The Master Design Awards portion of the evening featured the achievements of over 75 winners, many of who were on hand to receive their awards, namely:

Patricia Davis Brown (right) and team from PDB Fine Cabinetry.

The team from Marrokal Construction, San Diego.

Bruce Curtis of Washtenaw Woodwrights and Michael Klement of Architectural Resource, both of Ann Arbor, Mich.

The Team from Pierce Builders Inc., Genoa City, Wis. whose amazing Detached Structure — a tranformation of a two-story colonial guest house into an English Cotswold Cottage style — won a Gold award as well as Best of Show over $250,000.

See next month’s issue of Qualified Remodeler for more photos from the event.

ONEKAMA, Mich. — Normally, summer is a time when this part of northern Michigan hums with the activity of vacationers. This year, however, things are just a step slower. For Sale signs dot the lawns of many homes along these beautiful lakes. Many homes for sale look brand new. And they are.

There is no mystery to this malaise Michigan. The job losses in the auto industry and the pharmaceutical industry have hit the state very hard over the last 12 months and many people have put their vacation home up for sale as a result. The timing could not be worse. Sellers are encountering a very slow market and prices have come down quite a bit.

All of this is a shorthand for what is happening now in the remodeling market. Nationally the market is growing, but at a much slower pace than in the immediate past. This year remodeling is expected to grow at a 2% rate, versus almost 20% in 2005.

On Aug. 17, 2007, The University of Michigan released its latest quarterly assessment of consumer sentiment and at 83.3 it was at its lowest level in a year. In addition to dips in home-price appreciation, there has also been a general nervousness on Wall Street which has led to tighter credit markets and a flight from U.S. stocks.

Despite an aggregate level of $10 trillion in home equity around the country, the nation’s homeowners are have gone from feeling bullish to feeling gun-shy. Just a couple of years ago homeowners felt flush as the price of their homes — on paper — grew at a nice pace.  With home-price appreciation at 10% to 15% per year, it is a lot easier to spend savings on home improvement, or even to borrow to make home improvements. But now, all of those For Sale signs, in a very real way, have taken a little bit of the wind out of their sales. People are spending much more cautiously.

Some remodelers are even reporting that deals that would normally close quickly have taken longer to get done. Others say, customers have scaled back their plans. 

In any event, the fundamentals of the economy remain strong, and the underlying strength of the remodeling market — with all of the pent-up demand for housing rising — are reasons not to worry about the long term in remodeling. It is good. The real question is what, when, and how this deflated level of consumer confidence will re-inflate and float the remodeling market to higher levels.

My thought is that it won’t take much. It was very good news to remodelers that the Fed this week lowered its Discount Rate to banks by half a percentage point. It shows that current Fed Chairman Ben Bernanke is not about to sit idly by. He is willing to take action to provide a positive spark when needed.

The remodeling market is going to be fine. It won’t take much of a spark to get it’s growth rate back on track. 

Understanding the current remodeling outlook requires a look back at previous periods of slower growth in the market. This is particularly true because, on the face of it, the fundamentals for a strong remodeling market are in place.

Employment growth is strong.

The economy is growing.

Inflation is in check.

Mortgage interest rates are still within historically low ranges.

According to some observers, the remodeling market’s slower rate of growth (about 2% by the end of 2007 according to the Harvard Joint Center for Housing Studies) can be attributed solely to a market psychology. People who would normally buy an existing home in this market and subsequently fix it up are on the sidelines, waiting for a psychic “green light” to move forward with their plans.

This is evidenced by the fact that there are 4.3 million existing homes for sale in the United States right now about an eight month’s supply.

My theory is that the remodeling market and consumers needed this breather and that it will not be a long one. At some point the slower activity in existing home sales will yield to the demand that is clearly building up… the demand will burst this backlog.

For answers on the duration of this backlog, the building cycles have shown that when production home building goes down it fall in a range (peak to trough) that is much more pronounced that a subsequent remodeling slow down. According to Harvard’s Kermit Baker, remodeling cycles typically lag by 3 to 6 months behind production home building cycles. Already there are some production builders saying that the end of their down market could been seen by the end of 2008.

That bodes for stronger growth in remodeling well short of that date.