KBB - January/February 2013 - (Page 18)

FOCUS Outlook 2013 Are things looking up? It seems so… Cautious optimism seemed to be the dominant mood for the industry in 2012. Will that give way to something better this year? K+BB once again catches up with Kermit Baker, senior research fellow at Harvard University’s Joint Center for Housing Studies, to get his take on what to expect. markets turn the corner and more distressed properties work their way back to the market, what was a big minus for the home improvement industry will become a pretty significant plus. That’s going to provide a little pop for the industry for the next few years. What is your outlook for the remodeling market in 2013? Our most recent Leading Indicator of Remodeling Activity (released by the Remodeling Futures Program) was very positive—surprisingly positive. Since many of the elements we used to compute it were broader housing market indicators, such as existing home sales, housing starts, financing costs, clearly what pushed our leading indicator up is a broader recovery in the housing market. In the past, that has meant great things for remodeling, and hopefully, it won’t be any different this time. There is a lot of momentum behind the new residential construction market (off of a very low base), which saw 25 percent growth this year, and 25 percent is the consensus for next year. However, our leading indicator didn’t factor in a fiscal cliff, a blowup in the Euro debt problems or the Middle East. If they should sink the U.S. economy, the residential markets will follow. There’s still a risk that things are not going to be quite as rosy as our indicator is telling us. Are some regions doing better than others? For the last two or three years, the Northeast and Midwest have not been as hard hit by the housing downturn. They didn’t have as many distressed homes because they didn’t have as much construction. The markets that got overbuilt were most severely impacted. We’ll be issuing a report at the International Builders Show that looks at some of the strongest markets for home improvement spending. There are some names on that list we haven’t seen before: Phoenix, for example, is in the top five for spending per owner on home improvement activity in 2011 and is the prototype of the new market—very new housing stock and not a lot of home improvement spending on it. But it’s a market with a ton of distressed properties that has started to bounce back. By contrast, Las Vegas and the Florida markets aren’t quite as far in the recovery process. Atlanta didn’t see the downturn early and is now having trouble coming out of it. What’s spurring the growth in new construction? A better question might be: Why did it take so long? We’ve had unprecedented low levels of home building, but we’re finally starting to see growth in the number of households formed, which is the basic building block for housing demand. A lot of it is bounce-back from the housing bust and the distressed property situation. But the consensus on 25 percent growth for next year would take us to about a million housing starts for 2013. I think most analysts would agree once things get back to normal, the U.S. economy and our population can support 1.5 to 1.7 million housing starts. That’s what we averaged over the last several decades. What types of home improvement projects will people be doing? For the distressed projects, they’re more exterior work. What has been weak for the last four or five years has been discretionary projects, particularly the upper-end kitchen and bathroom additions, which will slowly come back. The contractors we’ve talked to are saying the average size has kicked back significantly in the last several years. They just don’t see many $150,000 to $200,000 kitchens; the budgets tend to be more $50,000 to $70,000. And it’s not: “Come in, gut it and start from scratch.”The remodels are more product-based: replacing countertops, resurfacing cabinets or installing new appliances. The financing issue is also difficult. Financing costs are very low, but banks have become more stringent about whom they will loan to. Typically, roughly 30 to 40 percent of the project activity on a dollar basis is financed, but now it’s probably under 20 percent. Increasingly, projects are done on a cash basis because households can’t get financing or don’t want to take on new debt and put their home at risk. Consequently, they’re less willing to increase the project budget by 15 to 20 percent to add a few extra goodies; if you’re financing, that might be an additional $100 to $200 a month, which is an easier sell. Contractors have to be much more sensitive to and work with the project budget they’re given. What factors do you see affecting growth in remodeling? We’re on the upside of the distressed housing problem, which, for years, was reducing home improvement activity. If you couldn’t pay your mortgage, you weren’t improving your home or even maintaining it. If the home went into foreclosure, and most of them did, it would undergo a process that averaged two years in most states, resulting in a fairly large stock of homes that has been dramatically under-invested in recent years. As those come back on the market, banks are fixing them up to ready them for sale. Similarly buyers and investors are sinking a lot of money into improving them. We estimate about $10,000 is spent on average for every distressed home once it comes back on the market. In 2011, home improvement activity on distressed properties amounted to about $10 billion—a pretty significant chunk of overall market activity. As these 18 + K BB January/February 2013 / www.kbbonline.com / The Official Sponsor of KBIS www.kbis.com http://www.kbbonline.com http://www.kbis.com

Table of Contents for the Digital Edition of KBB - January/February 2013

KBB - January/February 2013
Contents
Online Contents
Editorial
Show Director’s Note
KBIS Special Section
Web Savvy
Focus
Trends
Products
Design Feature: A Touch of Glass
Design Feature: Glam Rock
Practice
Ad Index
Favorites

KBB - January/February 2013

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