Remodelers lower expectations but anticipate growth
Wednesday, November 13, 2019
Remodeling activity in the third quarter eased slightly. Nonetheless, remodelers remain optimistic that business will rebound in the fourth quarter and they will finish the year on a positive note.
Less certain is what will happen next year. Industry forecasters project that demand will begin to drop in early 2020 and flatten out by mid-year, resulting in near-zero annual growth.
According to recent surveys of remodelers, activity in the third quarter of the year remained relatively flat compared to the previous quarter.
The National Association of Home Builders (NAHB) stated its Remodeling Market Index (RMI) posted a reading of 55 (indicating modest growth) for the third quarter, the same reading as for the second quarter. Remodelers reported slight declines in client traffic and in demand for both major and minor additions or alterations.
Similarly, results of the third quarter Kitchen and Bath Market Index (KBMI), jointly produced by the National Kitchen and Bath Association (NKBA) and John Burns Real Estate Consulting, were nearly exactly the same as for the second quarter (65.4 vs. 65.7, respectively), but several points lower than in the first quarter (71.0). NKBA members indicated business conditions in the third quarter softened somewhat from the previous quarter (61.7 vs. 62.7), yet perceived overall industry health to be positive.
Remodeling contractors responding to the Houzz Q4 Home Renovation Barometer survey showed a notable uptick in business activity during the third quarter compared to the second. However, much of that was attributable to an increase in project inquiries (up 11 points) rather than in new committed projects (up just 1 point). Contractors also reported that their backlog of committed projects had dropped to around five weeks, down from six weeks a year ago.
Yet, despite the lag in new projects, remodelers at the beginning of the fourth quarter were optimistic that business would pick up, largely due to an upswing in client inquiries late in the third quarter.
The NAHB said future market indicators in its RMI were up two points from the previous quarter, and contractors in the Houzz survey posted a four-point gain in Expected Business Activity. The future business condition indicator for NKBA members remained stable (68.4 vs. 68.7).
Remodelers have scaled back somewhat their expectations for business growth this year in the light of easing demand the past two quarters. Overall, NKBA respondents, for instance, now anticipate they will end the year with an average 3.5% growth in sales, down from a projection of 5.4% in the second quarter. This is more or less in line with the growth rate calculated by other industry forecasts earlier this year.
Circumstances may be more challenging for remodelers next year, however. Weak home sales and home construction completions mean fewer owners or buyers wanting to undertake remodeling projects. In addition, the ongoing shortage of qualified labor and rising cost of materials and products are causing some clients to cancel, delay or scale back planned projects.
Demand for remodeling will not cease but is expected to taper off by mid-2020. The latest Leading Indicate of Remodeling Activity (LIRA) from the Joint Center for Housing Studies of Harvard University projects that annual home improvement and maintenance expenditures will decline in the first quarter and then continue to recede, posting a modest decline of 0.3% through the third quarter of 2020.
Not all remodelers will be equally affected. Home sales are doing well in some areas of the country, demand for bathroom remodels remains high, more homeowners are engaging professionals to help with remodeling projects, and the NAHB says remodelers will be needed in areas affected by natural disasters. However, after several years of healthy gains, the industry is likely to be looking at a lean year ahead.
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