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Housing Affordability at Record Level



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reprinted from NAHB National Building News 5-30-2011

Housing Affordability at Record Level, But Tight Financing Constrains Sales

Not suffering as severely during the downturn as new construction and appearing to be gaining ground faster, the remodeling market is a relative bright spot on the current housing scene, panelists participating in a May 26 NAHB webinar on the remodeling outlook said, but home owner improvements could encounter some weakness later this year.

In the current recovery both remodeling and home building are dependent upon improvements in the economy, jobs and consumer confidence, all of which have been slow to rally but should start providing some momentum at the end of this year and in 2012, said NAHB Chief Economist David Crowe.

“This is the reverse of the typical recovery in which housing is the leader,” he said. “It’s not happening this time because of the excess housing inventory and small movement in house prices.”

Following a pattern similar to new construction’s, spending on owner-occupied improvements should stage “a nice recovery” and show a healthy percentage increase next year, bringing it up to the level of activity experienced at the end of 2007, he said, with considerably more growth ahead.

NAHB’s Remodeling Market Index (RMI) for this year’s first quarter was already registering improvements in the confidence of remodelers and was approaching 50, he said, the level on the 100-point index where equal numbers of those surveyed report that conditions are good and bad.

Four sub-components of the RMI already crossed over into positive territory during this year’s first quarter: with major additions and alterations to rental properties at 55.2, owners’ minor additions and alterations at 56.2, owners’ calls for bids at 54.6 and appointments for proposals for remodeling jobs at 52.4.

The reasons cited by remodelers in the first quarter survey for why customers have been reluctant to commission jobs point to factors that are the same or similar to those that have been holding back home sales.

Ninety percent of the remodelers said that their prospective clients have been hesitant because they think it is hard to obtain financing; 81% indicated that customers were constrained by the loss of home equity; and 74% said their customers were uncertain about their future economic situation.

“The secret to this recovery,” both for remodeling and home building, is that significant gains in employment are needed “to give workers confidence they will keep their jobs,” Crowe said. Only recently have jobs steadily begun to gain some real ground.

In general, remodeling is currently outperforming construction, he said, because “it’s an alternative to moving.”

In healthier times, remodeling tends to derive much of its strength from home sales, with consumers having the tendency to fix up a home before they sell it or soon after they buy it.

Kermit Baker, a senior research fellow at Harvard University’s Joint Center for Housing Studies and the project director of its Remodeling Futures Program, said that even with its recent decline, the remodeling market is shaping up at $300 billion annually.

The Joint Center’s measurement of total annual remodeling activity is broader than some because it includes spending on rental units and maintenance and repair of owner-occupied properties.

Total volume dropped from a peak of $326 billion in 2007 to $286 billion in 2009, a substantial decline of $40 billion, but well below the 75% slump in housing starts.

As a result, improvement and repair expenditures as a share of total residential investment climbed to 70% in 2009 and remained at roughly the same level in 2010, he said, up dramatically from a low point of just below 40% in 2005 when home building was at its peak.

A Downward Blip in a Volatile Year

Remodeling has gone through “a serious downturn by historical standards, though paling compared to the housing recession,” he said.

The volume of remodeling grew by a few percentage points in 2010 and it is “beginning to climb back,” with prospects for average annual growth of 3% several years into the future.

Based on the Joint Center’s Leading Indicator of Remodeling Activity, Baker suggested a downward blip for the nascent remodeling recovery in the second half of this year, “reflecting weakness in the broader housing market and home sales earlier this year and at the end of 2010” and a softening in sales at home improvement centers.

Following which, the industry should receive another boost of energy in 2012, he said.

In the meantime, there are “confused signals at present” and remodeling is “likely to have a volatile year, with a lot more variation than typically.”

As might be expected, Baker said, among the nation’s top 500 remodeling contractors, those specializing in exterior replacements of such items as windows and siding fared best during the downturn, with about a 5% dip in their median revenue in 2009.

Design/build contractors, who saw their business surge along with the housing market upturn of 2003-2007, posted a steeper median decline of 20%, and full-service firms — including kitchen and bath specialists -— were in the middle, losing about 12% of their sales.

Jobs related to green building and aging in place have both held up fairly well during the downturn, Baker said, driven, respectively, by the public’s conviction that energy costs will stay high and the fact that seniors have been in their homes long enough to still have large amounts of equity even after recent home price declines.

Distressed Properties

Another source of work for remodelers — sprucing up distressed properties — represents a growing opportunity in many areas of the country, such as Phoenix and Las Vegas, where foreclosures have been rampant.

In a survey conducted by the Joint Center more than 12 months ago, over a third of the respondents said they had worked on projects involving distressed properties over the past year, he said.

A more recent survey conducted in February found this niche market holding steady.

Those remodelers engaged in this line reported that it accounted for just under 20% of their past year’s revenue, and Baker estimated that it is responsible for some 5% to 10% of remodeling revenue nationally, “a share that will grow as homes work their way through the foreclosure process.”

Tabulations of the Home Improvement Research Institute’s (HIRI) 2010 survey of recent home buyers found that buyers of distressed properties spend more on remodeling in the first year after their purchase, by an average of about 15%.

While distressed properties are an important growth segment for the industry, Baker cautioned that remodelers who aren’t already located in the markets seeing the bulk of this activity probably don’t want to move to them because they aren’t among the strongest and existing home owners “don’t have much equity in these areas and are nervous about home prices.”

Baker observed that today’s remodeling customers are more budget-conscious and opting for smaller projects than before the downturn largely because they have been using their own money rather than loans for financing.

This February, HIRI’s monthly Consumer Sentiment Tracking Study indicated that 72% of the home improvement market is being supported by the home owner’s cash and funds.

“Financing remains a major issue for the industry,” Baker said. “In addition to consumers’ uncertainty over house prices, lenders are cautious, and many home owners are paying down debt and less likely to take on new debt.”

Best and the Worst

Parts of the country where remodeling has been faring the best tend to be places with the most stable home prices, he said.

Among the 45 largest metro areas for which data was available, home prices fell an average of 5.5% on the CoreLogic House Price Index year-over-year for the 12 months ending in December 2010. However, in key markets in the Northeast, Texas and California, prices were beginning to recover during that period.

Among those metro areas on the mend were: Boston, where prices were up 6%; Houston, up 2%; Washington, D.C., up 1%; and New York and Riverside, Calif., where they were flat.

Worst on the map housing price-wise were: Detroit, down 11%; Phoenix and Orlando, down 10%; St. Louis and Miami, 9%; Jacksonville, Fla., Seattle and Portland, Ore., 8%; and Chicago and Baltimore, 7%.

Rising house prices are beneficial, Baker said, because they help reduce the percentage of houses that are underwater. Households that owe more on their property than it is worth have “difficulty moving to a different home or area of the country to take advantage of economic opportunity,” he explained.

In last year’s fourth quarter, 25% of mortgages were underwater nationwide, and in some cities that share was more than half — Las Vegas, 69%; Phoenix, 57%;  and Orlando, 56% — or close to it: Riverside, Calif., and Tampa, Fla., 49%; Miami, 48%; Jacksonville, Fla., 47%; and Sacramento, Calif., and Detroit, 43%.

“The nature of the recovery is somewhat unusual,” Baker said, “favoring the manufacturing sector, which is unusually strong, and disproportionately favoring the Northeast and Midwest, where job growth is stronger than expected.”

Some parts of the West are doing well, such as coastal San Francisco, where there wasn’t as much overbuilding as some other locations in California, he said.

And Louisiana, Texas and Oklahoma are profiting from high energy costs.

“The states that didn’t have as much disruption in the housing market will be the first out, compounded with good underlying economies” Crowe said. “Texas and the farm belt and the energy belt are where we will see the best recovery” through next year.

For information on remodeling resources available from NAHB, click here.

For more information, email Kelly Mack at NAHB, or call her at 800-368-5242 x8451.

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