2007 Market Outlook

Experts predict 2007 will be a year marked by transition. "After three or four years of very strong growth, we are entering a transition period for the industry," says Kermit Baker, director of the Remodeling Futures Program at Harvard University's Joint Center for Housing Studies.

September 30, 2006

What's on the horizon for remodeling? Experts predict 2007 will be a year marked by transition.

"After three or four years of very strong growth, we are entering a transition period for the industry," says Kermit Baker, director of the Remodeling Futures Program at Harvard University's Joint Center for Housing Studies.

But don't think remodeling won't be robust: even with the 2006 slowdown in housing sales, remodeling will grow, Baker says. In fact, Gopal Ahluwalia, staff vice president for research for NAHB, expects residential remodeling volume to reach at least $238 billion in 2006 — an increase of 10 percent compared to 2005 — and expand another 9 percent in 2007, to reach $260 billion. After that, remodeling will continue to grow, but more slowly. Ahluwalia says residential remodeling volume will increase about 5 percent annually over the next 10 years, reaching $439 billion by 2014 and potentially overtaking new home construction.

New-home slowdown, remodeling gain?

The current deceleration in housing starts and sales has been unsettling for home builders, but it may not be all bad for remodeling. We're seeing "a general slowdown in the housing market, with rising inventories of new homes and existing homes," says Paul Bishop, manager of real-estate research at the National Association of Realtors. "Over the past few months, mortgage interest rates have ticked up a bit." Although nobody expects a big increase in rates — and Ahluwalia points out that rates still are not high — these market factors may affect remodeling.

On the one hand, says Bishop, higher interest rates mean "remodeling becomes a little more costly" for clients who borrow for home improvements. "The interest rates we're at now may cut off some remodeling projects," he says. On the other hand, slower home sales and a smaller new home inventory may encourage some homeowners to stay put and remodel rather than move. "Given the costs and time involved in selling [one home and buying another], remodeling is still in a pretty good position to move forward," says Bishop.

Even if some would-be sellers choose to stay in their current homes, millions of others will move, and that will stimulate remodeling by both sellers and buyers. Between 2001 and 2005, about 36 million new and existing homes sold, says Ahluwalia, and he expects housing turnover to remain high.

Also bolstering remodeling: the age of the nation's housing stock. "More than 50 percent of remodeling has nothing to do with interest rates," says Ahluwalia. It's must-do maintenance and repair of older homes.

People are staying in their houses longer before moving — on average more than 12 years — and they're taking care of their houses, too. With a huge inventory of houses built in the 1970s and earlier, plus 1.3 million new homes being added every year, it's a given that the maintenance side of remodeling will remain strong. "Low- to moderate-income housing stock has not had the level of investment it needs," adds Baker. "It will get routine systems upgrades" going forward.

Booking into 2007

Mike Nagel
RemodelOne

Scott Whitlock
Hubert Whitlock Builders

Splashy new kitchens, baths, additions and other upgrades will continue to be in demand next year, too, filling the schedule for full-service remodelers, experts say. "It's been a banner year this year and I don't see it stopping," says Mike Nagel, CGR, of RemodelOne in Roselle, Ill. By early summer, Nagel was booking into late spring 2007, with about half the work big ticket residential and half light commercial. "I'm very upbeat about remodeling in the Chicago area," he says.

With a $5.5 million backlog going into 2007, Charlotte, N.C., custom home builder and high-end remodeler Hubert Whitlock Builders is on target to grow 10 percent and reach revenue goals of $7.25 million in remodeling, $14.5 million total. The job mix will change, from 60 percent remodeling in 2006 to 50 percent next year, "but 2007 will be a solid remodeling year for us," says Scott Whitlock.

Why the change in job mix? "Remodeling is tougher to grow in our market," says Whitlock. The million-dollar remodels aren't happening much anymore and "we now are doing more jobs for the same revenue," he says. Charlotte is seeing a lot of growth, Whitlock adds. The city's brisk high-end remodeling market is attracting more competition — from remodelers new in town to area remodelers shifting into the high-end market to home builders launching into remodeling.

Shaping the year ahead

Look for these factors to affect remodeling in 2007, some presenting hurdles, others creating opportunities.

High materials costs: It starts with the cost of electricity. "Energy prices affect everything," from deliveries to fabrication equipment to petroleum-containing products themselves, says Nagel. Price hikes "trickle down to the cost of material and could drive the cost of a project beyond the budget. Concrete in our area has gone up 15 percent in the last two years. Cabinet plywood has gone from $46 to $65 a sheet in the last year and a half." Nagel expects most of his clients to go forward with their projects, but some may opt for less expensive features, such as opting for a lower-grade cabinet, like one of Nagel's customers did.

There's another side to energy-costs, too: interest in energy conservation. "Energy-related retrofits will be an important driver for the next few years," says Baker. Many of Nagel's clients now are willing to spend $1,500 extra for better spray-in insulation. In Charlotte, "people are much more aware and concerned" about energy use, says Whitlock. They're interested in energy-saving green products, and "some of our clients are going with energy-efficient mechanical systems. The payback period is relatively quick, and we're making people aware of it," says Whitlock.

Storm damage: Katrina and Rita may be long gone, but the damage they caused will be a significant factor in remodeling for the next 10 years, says Ahluwalia. In fact, adds Baker, "more severe weather patterns" are likely to generate more remodeling demand in storm areas.

War and terrorism concerns: Worries and uncertainties generated by gloomy news reports and the possibility of a major terrorist attack "make people nervous about spending money," says Nagel. "They become more frugal."

Technology: "New home trends percolate into the existing home market," says Ahluwalia. High-tech luxuries — such as state-of-the-art security systems and media rooms with big-screen televisions, projectors and reclining seats — are making their way into remodeling projects, he says.

The condo-rental mix: The sizzling condo market is cooling down. "High-rise luxury condos — both conversions and new buildings — are big [in Charlotte]," says Whitlock, "but we're about to get a glut of them." While the condo market has steamed ahead, "there has been very little investment in rental stock over the last six to eight years," adds Baker. "That tide has been stemmed." There's an emerging market for high-quality rentals and "we may see condo conversions to rentals over the next several years," Baker says. And that means more remodeling projects.

An evolving client base: Baby boomers have dominated the market and will continue to account for a big chunk of the nation's remodeling activity. This huge population segment "still accounts for over half of remodeling spending," says Baker. They pay big dollars to customize their homes, and "a good number," says NAR's Bishop, "will be thinking about making their homes more flexible ... as they get older."

Adds Baker: "There's a lot of potential for aging in place."

The Gen X market is coming on strong, too. Compared with boomers, the people in this generation "are doing as well or better" financially, says Ahluwalia. They, like the boomers, are hiring professional remodelers to produce high-quality projects. In fact, Baker says they are spending more now than baby boomers did at the same age. "Strong immigration numbers help backstop the Gen Xers," he adds.

Regional read-out: The hot spots for remodeling activity are shifting. The Northeast and Midwest have the oldest housing stock — in other words, houses most in need of maintenance and updating. Homes built in the 1970s in the South and West now are ripe for remodeling too, though, which is helping to heat up remodeling in those regions. Also fueling remodeling activity in the South and West, says Bishop, is the fact that they are "ideal places to retire, the chief places where baby boomers want to live."

Labor and competition: As Whitlock has discovered, the slowdown in new home construction can bring new players into the remodeling arena. The good news, points out Baker, is that it may also make subcontractor labor more available.

Not business as usual

Business has been so good over the past few years that many remodelers have picked up all the work they want just by taking phone calls from eager prospects. "This is the time in the cycle when a lot of businesses get sloppy," says Baker. Don't do it. The boom times we've seen "are not business as usual. Remodelers need to be aware of that."

Scott Whitlock's father is making sure his son gets that message. Having started the Hubert Whitlock Builders company 50 years ago and weathered a number of construction cycles, "he won't let us get too comfortable even in the best of times," Whitlock says. "We're watching the bottom line, keeping costs down and watching our overhead." The company is more than doubling its marketing budget to 1 percent next year. Because condo conversions are still a big market in Charlotte, Whitlock is actively going after them. And he's expanding the company's reach to the mountains 90 miles away, where many Hubert Whitlock Builders clients have or want to build vacation homes. "Diversity is important," he says.

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