Remodeling activity expected to slow in third quarter
Thursday, July 18, 2019
Having held relatively steady during the first half of the year, growth in home remodeling and renovation activity is expected to decrease somewhat in the months ahead. Fewer existing home sales and supply-side challenges such as a lack of skilled labor and rising costs have lowered demand for new projects.
Unless those conditions improve, analysts say, the long-range forecast predicts a significant reduction in annual growth in 2020.
Homeowner surveys conducted at the beginning of the year indicated remodelers could expect continued demand for their services throughout 2019, with a modest growth in revenue over last year. Recent reports of second quarter activity reveal a more mixed business environment.
Results of the Q3 2019 Houzz Renovation Barometer show contractors as a group experienced a notable drop in customer traffic during the second quarter of the year and have scaled back expectations for activity in the third quarter. Scores for recent business activity and expected business activity were each down 3 points from the previous barometer reading.
The length of project backlogs decreased as well, down 2.2 weeks from a year ago. Houzz principal economist Nino Sitchinava stated the combined readings for the construction sector, although still positive, were some of the lowest reported since 2015.
On the other hand, architects and interior designers anticipate an increase in business in the coming months. Combined scores were the most optimistic in two years.
Those for recent business activity and length of project backlogs remained steady compared to the previous barometer, but expectations for future activity rose a point, based on a recent increase in new project inquiries. Interior designers experienced higher demand for their services, with the score for recent business activity up 4 points compared to the previous reading and the score for expected business activity up 3 points.
Similar conditions were reported by remodeler members of the National Association of Home Builders (NAHB). According to the latest NAHB Remodeling Market Index, business activity held steady in the second quarter. Overall, the index was up 1 point from the previous quarter, with remodelers reporting a slight increase in current business (up 2 points). The outlook for future business conditions was more restrained, however, up just 1 point.
The Houzz report cites bad weather, along with other market challenges, including labor shortages and rising costs due to increased trade tariffs, as principle factors affecting demand in the second quarter. Acknowledging that, while still strong, the remodeling market decelerated somewhat in the second quarter, NAHB chief economist Robert Dietz also pointed to shortages of skilled labor and rising costs as impacting activity, pushing some projects beyond the level which homeowners can afford.
Fewer sales of existing homes also have rolled back earlier growth projections that had assumed high demand for housing would generate more sales and thus more need of repairs and renovations.
Unless those conditions improve, say analysts with the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University (JCHS), the industry can expect to see spending on remodeling and renovation projects recede drastically by midyear 2020. The Center’s newly released Leading Indicator of Remodeling Activity (LIRA) forecast projects that annual gains in homeowner expenditures for improvements and repairs will shrink from 6.3 percent in the current quarter to just 0.4% by the second quarter of 2020.
JCHS analysts also revised earlier calculations of growth in 2016 and 2017, stating the actual increase was only 5.4% over those two years, not the 11.9% previously estimated. That suggests that activity in 2018 and the first part of 2019 has been more in line with the actual growth trend of recent years. Current projections suggest that remodelers are likely to finish out the current year with a similar rate of growth before the trend begins to reverse itself.
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