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| The Bell is Tolling for the Remodeling Business in 2007 and 2008 |
| Written by Jonathan Smoke | |
| 06.12.2007 | |
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Discuss this article on the forums. (0 posts) In chapter 2 of The State of the Nation’s Housing 2007 report from the Joint Center for Housing Studies at Harvard University released on Monday, the state of the U.S. Housing Markets overall is reviewed, including existing housing, new home construction, rental and remodeling.  The prognosis is not good for any of the markets. Existing and new home sales are projected to be down for two years as an estimated 500,000 in excess production is slowly absorbed. While this happens, home prices will at best stagnate but will likely fall in many markets. The rental market may also be impacted by further vacancies caused by affordability.And remodeling will likely suffer as home price declines produce negative “housing wealth effects.” Housing wealth effects are caused when home prices appreciate, leaving homeowners with greater wealth from their homes, which can be tapped through refinancing and sales. “Despite significantly lower refinance activity in 2005 and 2006, the amount of home equity cashed out at refinance set records in both years...
With housing wealth effects still positive and homeowners holding billions in cashed-out equity, improvement expenditures set a record for the fifth consecutive year—up to $6.2 billion in real terms to $228 billion. But as the inventory correction proceeds and house prices soften further, housing wealth effects are likely to turn negative. When consumers start to realize that their home values are not appreciating at as rapid a pace (and may even be falling), they will spend less liberally and borrow less against their equity. When they do, both consumer spending and remodeling activity will slow. The magnitude of the impact will depend on how much prices fall nationally and in specific markets. The typical lag between a retreat in new construction and a cutback in improvement spending is about six months. Given the enormous amount of equity cashed out in 2006, the lag may be longer this time around. At some point, however, higher borrowing costs and weaker house prices will cause some homeowners to forgo or at least defer discretionary projects.” The authors looked back at the last housing downturn to see what the impact to remodeling will likely be: “And once homeowners start to feel less secure about their housing wealth, remodeling activity will also dip. Fortunately, improvement spending is typically less volatile than residential construction spending. In the last downturn, for example, remodeling expenditures declined 8.7 percent in real terms between 1987 and 1991, and then rose 11.5 percent in the subsequent three years. By comparison, new construction spending plummeted 33 percent and then rebounded 42 percent over the same period. However, spending on major improvement projects, like room additions and kitchen and bath remodels, did tumble nearly as much as new construction in the last downturn. Indeed, it was spending on replacements of worn-out systems that kept total remodeling expenditures from falling more.”
So, if your business relies on renovation and remodeling, you may soon see a decline in requests for proposals on big ticket projects. 
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