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JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Kennedy School of Government

Harvard University

Copyright 2008

www.jchs.harvard.edu

Remodeling Trends and Outlook

Kermit Baker

Remodeling Futures ConferenceApril 15, 2007

JOINT CENTER FOR HOUSING STUDIESHarvard University

www.jchs.harvard.edu


Harvard University

Copyright 2008

The Size of Home Remodeling Market is Estimated to Have Declined in 2007

108 121 136162 172

205231 247 24341

4044

4857

5549

51 52

0

50

100

150

200

250

300

350

1995 1997 1999 2001 2003 2004(e) 2005 2006(e) 2007(e)

Rental spending

Owner spending

Billions of dollars

Sources: JCHS tabulations of 1995-2005 American Housing Survey (AHS) and the US Department of Commerce Survey of Expenditures for Residential Improvement and Repairs (c50 reports).

161149180

210

280

229

260

298 295


Harvard University

Copyright 2008

Owner Remodeling Spending Began to Soften in Late-2006 According to C50 Estimates, and Has Shown Annual Declines Since in Mid-2007

148.7150.8

158.0

166.3170.1

178.2181.0

177.7175.4 173.7

165.5

18.6%

15.9%

6.8%

3.1%

-2.5%

-8.6%

18.5%

14.6%18.2%

14.4%

20.4%

$100

$110

$120

$130

$140

$150

$160

$170

$180

$190

2005 -Q1

Q2 Q3 Q4 2006 -Q1

Q2 Q3 Q4 2007 -Q1

Q2 Q3-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Homeowner Remodeling ActivityFour-quarter moving totals($ billions)

Annual Moving Rate of Change

Source: U.S. Census Bureau, Residential Improvements and Repairs Statistics (C50).


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Copyright 2008

But While Spending by Owners Has Been Slowing, Spending on Rental Units Has Been Growing

170.1178.2 181.0 177.7 175.4 173.7

165.5

48.6 48.8 49.2 50.5 49.9 51.8 52.1

18.2%

6.8%

-7.9%

0.3%

3.7%

6.3% 5.9%

-3.8%

14.6%

2.7%

-8.6%

-2.5%

3.1%

14.4%

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2006- Q1

Q2 Q3 Q4 2007- Q1

Q2 Q3 2006-Q1

Q2 Q3 Q4 2007-Q1

Q2 Q3-10%

-5%

0%

5%

10%

15%

20%

Homeowner Remodeling ActivityFour-quarter moving totals($ billions)

Annual Moving Rate of Change

Source: U.S. Census Bureau, Residential Improvements and Repairs Statistics (C50).

Owner-occupied units Rental Properties


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Copyright 2008

Most Remodeling Indicators Have Turned Negative

Contractor payrolls

Remodeler business expectations (RMI)

Existing home sales


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Copyright 2008

Remodeling Contractor Payrolls Are Declining

274.8

280.4283.5

286.5291.3

295.9

308.7 310.2 310.8 309.9306.5 305.0

301.0

8.4%

7.2%

6.1%

5.0%

6.5%

-1.2%

7.8%

2.9%

-1.8%

6.2%5.6%

6.0%

7.2%

240

260

280

300

320

2005 -Q1

Q2 Q3 Q4 2006 -Q1

Q2 Q3 Q4 2007 -Q1

Q2 Q3 Q4 2008-Q1(e)

-4%

-2%

0%

2%

4%

6%

8%

10%

Residential Remodelers, All Employees, 4-Quarter Moving Totals (Thousands)

Source: U.S. Department of Labor, Bureau of Labor Statistics.

Annual Moving Rate of Change (%)


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Remodelers’ Future Expectations Have Been Negative Since Late 2005, and Continue to Drop

57.8

52.4 52.454.0 53.6

52.8

47.548.9

43.545.4 46.0 46.5

44.143.3

37.9

51.8

30

35

40

45

50

55

60

2004- Q1

Q2 Q3 Q4 2005- Q1

Q2 Q3 Q4 2006- Q1

Q2 Q3 Q4 2007- Q1

Q2 Q3 Q4

Remodeling Market Index: Future Expectations, SA

Source: NAHB Economics Group- Remodeling Market Index, Qrtly. Survey of Remodelers.


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Pending Home Sales Are Falling

124.5 125.4 124.4123.1

119.2

111.9109.2

105.6

100.5

96.4

91.7

122.6

114.3

6.3%

2.9%

8.8%

-11.4%

10.7%

0.4%

-4.3%

-8.9%

-16.0%

-12.1%

-10.1%

-13.9%

-11.3%

80

90

100

110

120

130

2005 -Q1

Q2 Q3 Q4 2006 -Q1

Q2 Q3 Q4 2007 -Q1

Q2 Q3 Q4 2008-Q1(e)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Pending Home Sales Index, NSA, four-quarter moving average

Annual Moving Rate Of Change

Source: National Association of Realtors.


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Copyright 2008

Leading Indicator of Remodeling Activity Points to Further Declines Through This Year

$149$151

$158

$170

$178$181

$178$175 $174

$166

$175$173 $172

$164$166$166

20.4%

-4.8%

-1.1%-0.9%-1.7%-1.7%

-8.6%

-2.5%

3.1%

6.8%

14.6%

18.2%

14.4%

15.9%

18.5%18.6%

$100

$110

$120

$130

$140

$150

$160

$170

$180

$190

2005-

1 2 3 4200

6-1 2 3 4

2007-

1 2 3 4200

8-1 2 3 4

-10%

-5%

0%

5%

10%

15%

20%

25%

Homeowner Remodeling ActivityFour-quarter moving totalsBillions of $

Four-Quarter MovingRate of Change

Source: Joint Center for Housing Studies.


Harvard University

Copyright 2008

The Geography of Remodeling

Areas likely to see steeper/milder downturns in remodeling spending in 2008:

Metro areas with greatest/least declines in sales of existing homes – affects opportunities to remodel

Metro areas with greatest/least home price declines –affects homeowner ability and willingness to remodel

Based on trends in top 50 metro areas in the U.S.


Harvard University

Copyright 2008

Markets Least Vulnerable to a Remodeling Downturn Concentrated in Industrial Midwest, Texas, and Pacific N.W.

Top 10 markets for house prices and existing home sales of 50 largest metro areas

Sources: OFHEO and Moody’s Economy.com estimates of state level total home sales from NAR.

Note: changes in prices and sales measured over past 12 months.


Harvard University

Copyright 2008

Markets Most Vulnerable to a Remodeling Downturn Concentrated in California and Florida

Bottom 10 markets for house prices and existing home sales of 50 largest metro areas

Sources: OFHEO and Moody’s Economy.com estimates of state level total home sales from NAR.

Note: changes in prices and sales measured from high for this cycle.


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Performance of Larger Contractors During Remodeling Market Downturn

Revenue growth has slowed

Contractors focused on replacement and systems upgrade projects have fared better

Larger firms have reported more stable revenue


Harvard University

Copyright 2008

Revenue Growth for Larger Remodeling Contractors Has Slowed Recently

7.4%

4.4%

8.1%

12.5%

7.5%

4.4%

0%

5%

10%

15%

2001 2002 2003 2004 2005 2006

Median annual rate of growth in revenues

Source: Qualified Remodeler magazine Top 500 contractors; 2000-2006.

Note: Analysis used top 400 firms each year that reported revenue for that year and the previous year; outliers eliminated from 2006 estimate.


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While Averaging 4% Growth, Large Contractors Reported Tremendous Variation in Their Performance in 2006

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

$0 $5 $10 $15 $20 $25 $30 $35 $402005 Revenue in Millions (topcoded at $40M)

Design/Build

Full-Service

Specialty

Other

Percent Change in Revenue, 2005-2006

Trend line

Note: Analysis used top 400 firms that reported revenue for 2005 and 2006; change in revenue outliers were eliminated.

Source: Joint Center analysis of Qualified Remodeler magazine Top 500 contractors; 2005 and 2006.


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Growth Slowed the Most for Design/Build and Full Service Contractors

4.4%

1.9% 1.7%

5.7%

12.4%

0%

5%

10%

15%

All Design/Build Full-Service Specialty Other

Median annual rate of growth in revenues, 2006


Source: Qualified Remodeler magazine Top 500 contractors; 2006.


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In 2006, Specialty Contractors and Larger Contractors Reported Less Variation in Revenue

80

85

90

95

100

105

110

115

120

Desig

n/Bui

ld

Full-

Servi

ce

Spec

ialty

Other

by Contractor Focus by Contractor Revenue


Source: Joint Center analysis of Qualified Remodeler magazine Top 500 contractors; 2005 and 2006.

80

85

90

95

100

105

110

115

120

unde

r$5

Mill

$5-$

10 M

ill

$10-

$20

Mill

$20+

Mill

Relative variation in revenue growth, 2005-2006 (100=standard deviation for all firms)


Harvard University

Copyright 2008

Implications for Remodeling Outlook

Remodeling industry is slowing; weakness expected to continue through the year.

Markets with least declines expected to be concentrated in industrial Midwest and South Central states; markets with greatest declines likely to be in California, Florida, and Southwest.

Larger contractors specializing in replacement projects have fared better recently; larger firms likely to see more stability in revenue during this downturn.

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