Home Improvements Weak, But Future Holds Opportunity

A growing number of home builders are diversifying into remodeling hoping to find jobs to tide their businesses over until the home buying market returns, but remodeling over the short term continues to display weakness of its own as home owners pull back from major improvements to their property.

Economists at last month’s International Builders’ Show in Orlando noted that consumers have lost significant amounts of both confidence and wealth and are not in a spending mood. Even for most remodelers, who haven’t taken as much of a drubbing as home builders, the goal will be to survive another difficult year as they prepare for opportunities that will emerge on the other side of the recession.

The Leading Indicator of Remodeling Activity from the Joint Center for Housing Studies of Harvard University projects that home owner improvement spending will be declining at an annual rate of 12.1% by this year’s third quarter, moving to $109.5 billion. Home owner spending on improvements peaked at an annual rate of $141.9 billion in the second quarter of 2006.

The market has seen steady declines since the middle of 2007, although recently the rate of decline has flattened, the Harvard index shows. “While we may be nearing the bottom of the remodeling cycle, there is little to push spending back into a growth phase until the economy recovers,” said Kermit Baker, director of the Joint Center’s Remodeling Futures Program.

Expenditures on owner-occupied units were responsible for 84% of the remodeling market’s $326 billion in activity in 2007. Improvements — as opposed to more routine maintenance and repair — accounted for 70% of the total.

“Despite the gloom today, remodeling is still viable,” said William Apgar, senior scholar at the Harvard Joint Center, even in the absence of conditions favorable for upper-end discretionary jobs. Expenditures in that category grew 23% in 2005 and 7% in 2007, compared to 13% and 6%, respectively, for total remodeling activity.

While the current remodeling downturn is more severe than in previous cycles, the industry is performing notably better than home building. As of the third quarter of last year, home improvements were down an estimated 15.5% compared to a far steeper 52.6% slump for single-family construction.

A new Joint Center study, “The Remodeling Market in Transition,” notes that exterior replacements, system upgrades and disaster repairs — which vary little from year to year — are creating a floor for spending in the home improvement market.

“While upper-end discretionary projects are responsible for most of the volatility in home owner spending, even at their inflated 2007 share, these projects accounted for 30% or less of total expenditures,” the study says. “As a result, even if some discretionary projects were deferred and others were downsized, the impact on overall remodeling expenditures would be much more modest than the decline to date on the construction side.”

Apgar cited the decline in home equity, a major funding source for projects, as a significant factor behind the remodeling slowdown. From its recent $12.5 trillion peak in the final quarter of 2005, owner equity in household real estate has declined by roughly $4 trillion, or almost 32%. Even so, this “will stabilize,” he said. Home owners “still have equity of $8.5 trillion, a lot of wealth,” he said. “But people want to see where the end is before they commit.”

Another drawback for remodeling is the current slowdown in home sales; existing home sales were off nearly 30% in the third quarter of 2008 from their recent peak. “New buyers engage in a lot of remodeling activity,” Apgar said. “The patterns of recent buyers are different from longer-term owners.”

According to the Joint Center, households that relocate spend an average 20% to 25% more on improvements than otherwise similar households that do not move.

Apgar also observed that “there has been a definite decline in the past four to five years in the likely recovery of remodeling expenditures when the house is sold.” During the peak of the boom, some remodeling projects actually increased the selling price of the house by more than $1 for every $1 spent. Average cost recovery declined steadily from 87% in 2005 to just over 67% in 2008, according to Remodeling magazine and the National Association of Realtors®.

The share of cost recovered from home improvement projects typically increases when house values are rising and decreases when values are falling, says the Joint Center report.

The good news, Apgar said, is that those who do make it through another difficult year can expect to have some strong fundamentals on which to build new remodeling business.

The new Joint Center report identifies three sources of demand that are most likely to boost improvement spending once a remodeling turnaround begins to materialize:

• The increasing need to upgrade the rental housing stock. “Years of underinvestment have left the nation’s rental stock, at an average age of 36 years, in desperate need of improvement and repair,” said Baker. In 2007, almost 10% of rental housing — more than 3.6 million units — were structurally inadequate.
  
  “The poor condition of the rental inventory reflects years of neglect,” the study says. While expenditures on the owner- and renter-occupied stock moved in tandem throughout the 1970s and 1980s, their paths began to diverge in the early 1990s. “Average per unit improvement and maintenance expenditures for rental units fell by almost 40% in inflation-adjusted terms between 1990 and 2007, while expenditures on owner-occupied units increased by almost 30%.”
  
  Spending will be focused on replacements and system upgrades, as well as maintenance, the study says. However, current housing market conditions are likely to delay the process of significant reinvestment in the rental stock. For the time being, the glut of vacant for-sale units that have at least temporarily been converted to rentals is reducing rents and dampening the demand for older units, “discouraging rental property owners from making improvements in the near term.”
  
  
• Ongoing growth in the immigrant home owner market. “Foreign-born home owners, who currently account for more than 10% of home improvement spending, are heavily concentrated in their 30s and 40s, ages when families are growing and changing the use of their home,” Baker said.
  
  “Immigrants are key to the future growth of the U.S. home improvement industry,” according to the Joint Center report. “In 2007, foreign-born households spent about $23 billion on improvements on their homes. Their spending levels have grown almost 13% per year since 2000 — well in excess of the 7% among the domestic-born population.”
  
  Immigrants are concentrated in gateway cities along the California coast, in Texas and southern Florida and along the Northeast corridor, the study says. “In these high-cost housing markets, owners devote a relatively large share of their incomes to home improvements. In the 12 metropolitan markets where foreign-born home owners spent at least $500 million on home improvements in 2007, the immigrant share of expenditures was well above the national average of just over 10%. In five metro areas — Houston, Miami, San Diego, San Francisco and Washington, D.C. — immigrants contributed more than a quarter of all remodeling expenditures.”
  
  The report also notes that immigrants have dispersed to an increasingly broad array of housing markets.
  
  
• Emerging interest in sustainable remodeling projects. “If we are going to meet the nation’s energy goals, we have to continuously search for ways to improve the residential built environment,” said Mohsen Mostafavi, dean of the Harvard University Graduate School of Design, where attention to green design is a growing focus in the classrooms and studios. “Maximizing energy-efficiency in existing housing may be one of our greatest challenges, but also one of our greatest opportunities. Consumer demand for sustainable design is on the rise. Architects and planners can lead the way in devising appropriate solutions.”
  
  In 2007, home owners devoted more than $52 billion of their improvement expenditures to energy-related projects such as replacing appliances and lighting systems, upgrading their HVAC systems and increasing insulation — up from less than $33 billion in inflation-adjusted terms a decade earlier, the study says.
  
  “Motivated by broader environmental concerns, consumers have demonstrated a growing interest in products and projects that meet additional green goals: quality and durability, environmental performance, and safety and disaster mitigation,” the report says.
  
  In a survey, the Joint Center asked full-service remodelers how frequently they installed green products that met at least one of these criteria, focusing on 10 products listed by the Partnership for Advancing Technology in Housing as having the “most promise for making our existing homes more durable, stronger and more resource-efficient.” The respondents indicated that they were no more likely to install energy-efficient products than products promoting the other goals. About 40% said they regularly or occasionally installed products in each of the four categories. “Some products with energy-saving properties, such as high-performance windows, were used almost universally, while others such as tubular skylights had not yet penetrated most markets.”
  
  To gauge future trends, the survey also asked the contractors to identify products for which consumers have expressed increased interest. “Here again,” the study says, “there were no major differences between products promoting energy efficiency and those meeting other green objectives.” However, there were wide differences in interest in specific products within each category. For example, among energy-efficient products, “more than 80% of contractors noted greater consumer interest in compact fluorescent lighting, but only half saw greater interest in wireless lighting and temperature controls.”

The Joint Center also notes that when housing markets recover, foreclosed properties will provide opportunities for home improvements. Banks and new owners will renovate and repair these properties and state and local governments will make use of the Housing and Economic Recovery Act of 2008, which allocated $4 billion for the redevelopment of abandoned and foreclosed properties.

Despite today’s downturn, the Joint Center reports that, “Remodeling still rests on a solid foundation with 130 million homes — and one to two million added yearly — in continuous need of maintenance, upgrades, repairs and adjustments to meet the nation’s changing preferences and lifestyles.”

For your Sussex County, Delaware home improvement project, please visit www.yourhoneydoman.com

New Energy Tax Credit to Boost Demand for Renovation Jobs

Beefed-up tax credits for energy-efficient home improvements in the new economic stimulus package are expected to help increase demand for green renovation projects this year and next.

The IRS Section 25C tax credit for existing homes, which had expired at the end of 2007, was reinstated as part of the economic rescue package passed by the Bush Administration last fall. Installing energy-efficient windows, doors, roofing and insulation as well as furnaces, air conditioners and heat pumps all qualified for the credit.

But remodelers found that the terms of the 25C credit — equal to only 10% of the cost of each product and with a lifetime cap of $500 — weren’t quite strong enough to get enough home owners off the fence and into a contract.

Under the stimulus legislation signed by President Obama, the percentage of the cost and lifetime cap have been tripled to 30% and $1,500, respectively; the list of eligible improvements has been expanded and the deadline for applying has been extended through the end of 2010.

The new tax credit also is in alignment with industry research showing that remodeling and retrofitting the nation’s older homes will have a far more significant impact on reducing residential energy consumption than meeting even the most aggressive efficiency goals for new homes, according to Greg Miedema, CGR, CGB, CAPS, chairman of NAHB Remodelers.

“These new tax credits are another way that the home building industry can combat the potential effects of global climate change by encouraging home owners to make energy-efficient improvements to their homes,” said Miedema.

A 2008 California study showed that homes built before 1983 were responsible for 70% of the greenhouse gas emissions related to single-family envelope energy consumption.

The study also found that spending $10,000 to retrofit a 1960s home could save 8.5 tons of carbon at a cost of $588 to $1,176 per ton, depending on existing tax credits and incentives. By comparison, increasing the energy efficiency of a new home 35% over current state requirements would cost about $5,000 and would reduce emissions by 1.1 tons at a cost of $4,545 per ton.

The bottom line is that retrofitting existing homes with energy-efficient features is four to eight times more carbon- and cost-efficient than adding further energy-efficiency requirements to new housing, the study showed.

Tax Credit How-to

Details on qualifying improvements will soon be available at the IRS Web site.

Remodelers should familiarize themselves with the model types and products that qualify for the tax credit so they can advise their customers. However, they do not need to give their clients the product sales receipts to verify the claim. A certification statement such as Energy Star qualification — part of the manufacturer’s product information — will suffice.

Home owners should submit the appropriate schedule forms with their tax returns and should retain records that include:

• Name and address of the manufacturer
• Identification of the component
• Make, model or other appropriate identifiers
• Statement that the component meets the 25C standards
• Climate zones for which the criteria are satisfied
• Additional information for storm windows, if applicable
• A declaration that the certification statement is true

Reported on Nations' Building News, http://www.nbnnews.com/NBN/issues/2009-02-16/Front%2BPage/3.html

Home Renovations on Sale

Materials costs are plunging, and contractors are begging for work. Suddenly that long-postponed remodel is looking like a smart idea.

(Money Magazine) -- If you're struggling to see a silver lining in the beaten-down real estate market, consider this one: It may be a rotten moment to sell your house, but if you've postponed a much needed renovation project on your home - replacing a rotting deck, repairing a leaky roof or updating an antiquated bathroom - now just might be the best time in years to tackle that task.

The reason: Costs are starting to drop - in some cases, sharply - on everything from building materials to contractors' fees as the economy weakens and housing prices tumble.

In fact, consumer spending on home improvements is off by 12% since peaking last year, according to Harvard's Joint Center for Housing Studies - and that works to the advantage of anyone willing and able to remodel now.

"It's hard for homeowners to think about spending on their houses when real estate values are falling," says Kermit Baker, a senior research fellow at Harvard who tracks remodeling trends. "But with contractors hungrier for business, you'll be able to negotiate better prices, win other concessions and hire better-quality contractors than you could a year or two ago."

Overall, experts say, you can expect to save at least 10% on the cost of a renovation and possibly a lot more, depending on where you live and the project you choose. And if prices on many remodeling materials continue to decline as projected over the next few months, the cost of home improvements should fall even further.

Yet another benefit: Putting money into needed repairs and updates now should help your home maintain its value even as other house prices keep falling.

Of course, not all renovations are created equal. Adding a home office or a swimming pool might be on your wish list, but these days neither is likely to give you much of a return on your investment.

With home prices still in a free fall, it's more critical than ever to understand which projects will return the most on your investment and how to negotiate the best deal with the pros you hire to do the job. The following strategies should help.

Cherry-pick your project

Understand this from the outset: No matter what kind of repair or renovation you undertake, you can't count on the payback you'd have gotten a few years ago when home prices were rising steadily.

According to a new study by Remodeling magazine, these days you can expect to recoup about two-thirds of your costs on a typical home improvement if you sell your home within a year after completing the job, compared with 87% in 2005, when home values were at their peak.

That means you have to be especially careful in choosing which jobs to do, considering the urgency of the need (if that roof is leaking, you really have to fix it now) as well as what you'll pay in material costs, how much of the total bill you may recover and any extra benefits you may get.

To the extent you have a choice, focus on projects with better-than-average returns that may yield additional savings in other ways. For example, installing new windows will cost $10,000 to $20,000 on average but return 75% to 80% of your investment (see "Payback time" above and to the right for the six projects with the best return).

And those improvements have the added benefit of making your home more energy-efficient, so you'll also save on your electricity and heating bills. Plus, you may qualify for tax credits that will further offset the cost of making the changes. A host of home improvement tax credits for windows, doors, insulation and roofing were added or extended in the recent bailout bill; for the complete list, go to energystar.gov.

Some exterior improvements also make a lot of sense right now thanks to sharply lower oil prices. That's because many petroleum-based products, such as asphalt and vinyl, are the core material in these renovations.

The costs of these products had soared recently along with the price of oil but have started to drop, making this the best time in a while to replace your aging roof, repave your driveway or redo your vinyl siding. (See "Building blocks at a discount" above and to the right for a look at recent price changes in key remodeling materials.)

Also think about limiting the scope of the project, since minor upgrades rather than major additions give you more bang for your buck today. For instance, if you modernize your bathroom, you can expect to recover about 75% of what you spent, but adding an entirely new bathroom will pay back only 64% of the cost of the job.

Press for a price break...

These days you'll find a glut of construction professionals vying for your business - a far cry from the situation a few years ago when it was impossible to get a reputable contractor to return your call and a six-month wait to start a kitchen remodel was the norm.

How low can you ask remodeling pros to go? According to a new survey by the contractor referral site Angie's List, 70% of home builders and remodelers are willing to drop prices at least 10%, and 30% say they'll give even steeper discounts.

"There's a larger pool of professionals fighting for these jobs, so a little negotiation may go a long way to get the best possible price for your project," says Angie Hicks, founder of Angie's List, which charges a monthly fee of $6 for access to customer reviews and references.

You'll have the most leverage in the areas that have been hit hardest by the housing slump. But no matter where you live, you should be able to strike a bargain (for tips, see "Hiring a Contractor" above and to the right).

Get bids from at least three remodelers, and insist that their quotes spell out all costs, including labor as well as materials (brand-name products where possible).

Let each pro know up front that you are comparison shopping and that price, in addition to quality craftsmanship, will play a key role in deciding whom you will work with. With the bids in hand, you can then compare prices and start negotiating.

Shopping around really paid off for Nancy Boris, who saved $2,800 on the cost of replacing the back patio of her 2,400-square-foot, three-bedroom home in Roseville, Calif.

Boris, a nurse case manager, got bids ranging from $2,400 (from a contractor who didn't have insurance or references) to $5,800. The highest bidder eventually came down $2,000 in price to $3,800, but Boris ended up going with a pro who had better references for $3,000.

...but be wary of super-low bids

As Boris discovered, it doesn't always pay to just reflexively choose the contractor who comes in with the lowest quote.

In their eagerness (or perhaps desperation) to win business in these tight economic times, some less than scrupulous remodelers may cut corners to come up with that low bid or else leave off charges that they may tack on later, making the actual cost of the project higher than it seemed initially.

Carefully scrutinize any bid that comes in significantly lower than the rest. Ask the contractor, politely but point-blank, how he manages to undercut his competition.

Does he have a general liability policy and workers' compensation? If not, should one of the crew get injured on your property, you'll be liable. Is he using low-quality materials? Is everything you need to get the job done included in the bid?

Then follow up by asking for references from previous clients and checking out his reputation and work history. To do so, go to contractorcheck.com, where for a fee of $13 you can get information about licensing and insurance as well as any legal actions taken. Sites like ContractorsFromHell.com and AngiesList.com can also provide valuable insights.

Wring out extra concessions

In addition to price breaks, ask for other perks while you're negotiating, like a faster completion or a more convenient schedule for work to be done, advises Sal Alfano, editorial director of Remodeling.

Remember, homeowners nowadays are in the driver's seat. "With contractors working on fewer projects, you can expect better service," he says. "Even if in the end you don't get a significantly better price on your project, you should at least get better work done."

For local work in Sussex County, Delaware visit www.yourhoneydoman.com.