Remodeling Market
It May be Down But It’s the Place to Be
by Tara Taffera

It’s been obvious for the last several years that the remodeling market is stronger than the single-family new construction market. It used to be that window manufacturers would describe their businesses as a mix of remodeling sales and new construction. In many cases the numbers weren’t that far off from one another. But when the housing bust came, those selling to the single-family home market flocked to remodeling. Now when you ask a manufacturer or dealer about his percentage you get answers similar to Stan Stokes. Stokes, president of K.C. Co., a member of Pella® Windows and Doors Direct Sales Network in Beltsville, Md., says, “In this day and age about all of it is remodeling—considering the market is a remodeling market. We sell a great deal to the remodeling contractor and that market is up and is doing well.”

He also points out that the remodeling model is simply a better business model.

“It doesn’t go up and down like new construction,” says Stokes. “You don’t have to create a large infrastructure and you don’t get the big swings. It also has better margins, and is more service-oriented.”

There are several indicators that track the growth and positive indicators of the remodeling market seen by companies like K.C.


A Look at the Ratings
One such indicator is the National Association of Home Builders’ (NAHB) Remodeling Market Index (RMI). The overall RMI combines ratings of current remodeling activity with indicators of future activity, like calls for bids. Current market conditions for the second quarter of 2011 fell to 44.8 from 46.1 in the first quarter. An RMI below 50 indicates that more remodelers report market activity is lower compared to the prior quarter than report it is higher.

Future market indications dropped to 43.0 from 46.8 in the quarter. The NAHB attributes this to a “sluggish economy.”

But while the RMI may be off from the previous quarter “this is still the second highest RMI we’ve been able to report since the third quarter of 2007,” says NAHB chief economist David Crowe. “There are several barriers blocking the way to a stronger recovery. Homeowners who may want to remodel still face stringent lending requirements, and uncertainty about the economy is making them hesitant to undertake major improvements.”

While NAHB’s RMI shows a slowdown, so does the Leading Indicator of Remodeling Activity (LIRA), which is tracked by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

The LIRA is projecting that annual remodeling spending through the first quarter of 2012 will be down 4 percent. The Census Bureau’s improvements spending series, to which the LIRA is benchmarked, recently was revised downwards as well.

“The recent slowdown in the economy has caused home improvement spending to weaken again,” says Eric S. Belsky, managing director of the Joint Center. “Falling consumer confidence levels have undermined interest in discretionary remodeling projects.”

“What looked to be a promising upturn in home improvement spending earlier this year has begun to stall,” adds Kermit Baker, director of the Remodeling Futures Program at the Joint Center. “Housing starts, existing home sales and house prices have all been disappointing lately, which has dimmed prospects for home improvement spending gains this year.”

So while large gains in remodeling may not be on the horizon, companies serving the replacement market definitely seem to be faring better than those dependent on the single-family housing market.

Another tracking index, the residential BuildFax Remodeling Index rose 23 percent year-over-year—and for the twentieth straight month—in June to 129.5, the highest number in the index to date. Residential remodels in June were up month-over-month 5.2 points (4 percent) from the May value of 124.3, and up year-over-year 24.5 points from the June 2010 value of 105.0.

"You can’t look at a consumer and say sign up now because I can’t get to you in a few weeks. There was a lot of that and that is gone."
—Stan Stokes, K.C. Company

Joe Emison, one of the founders of BuildFax, says the index
measures rates of change in the remodeling business.

“We are not measuring dollars,” he says. “We look at building permits not total dollars spent.”

But whatever the tracking mechanism, one thing is for certain.

Homeowners Stay Put
“What we can see nationally is that people aren’t moving,” says Emison. “People are moving when they have to such as relocating due to a new job. I would expect that to continue for quite a while.”

But that’s not the only reason for people staying in their homes.

“There are too many homes on the market, the economy is not doing well, foreclosures still need to be processed and it is harder to get a mortgage. I don’t see it changing anytime soon,” he says.

Emison also points out that homeowners looking to remodel fall into two categories: those who want to sell and those who want to be more comfortable.

“What we see is the rise of the comfort remodel and a drop in remodeling for resale,” says Emison. “If I were a building products manufacturer I would be looking at what in my product line targets this comfort remodeler. I would be promoting things that are cost effective and the comfort aspects of them.”

Adam Kaliner, one of the founders of Power Home Remodeling, a company that just landed at number 670 on Inc. magazine’s 500/5000 list of Fastest Growing Companies, says his company markets toward the consumer who remodels for comfort.

“We aren’t into looking for people who want a quick fix,” he says. “We look for those who are looking for a value proposition, for example, improving energy efficiency.”

Stokes agrees and adds that the financing part of the equation has also pushed consumers toward a remodel or window replacement.

“The financing part has become such a pain in the butt that no one wants to deal with it,” he says. “Who wants to go through all that when you can just add a room?”

But even though remodeling may be the easier choice, financing sometimes plays into this decision as well.

“There are limited financing options … so the scale of the project has to be lower,” says Kaliner.

Stokes says it oftentimes comes down to that perfect number.

“There is a magic number in the remodeling world and if you can stay in that range a customer doesn’t have to go through financing,”

“There is a magic number in the remodeling world and if you can stay in that range a customer doesn’t have to go through financing,” he says. “The average figure is about $10,000. If that number gets bigger, then yes, they will need financing.”

But he doesn’t see it as much of an issue.

“Most people who are pricing a job are aware of the costs and they can get the money,” says Stokes.

Adapting to Challenges
But he says there is a big factor that now comes into play that didn’t exist before, creating challenges for companies like his.

“People are more patient and they are taking the time to price a job,” says Stokes. “They aren’t as much in a hurry as they were several years ago. There was a sense before that if you want to get this done, you need to do it now. But they know remodelers aren’t busy now. You can’t look at a consumer and say ‘sign up now because I can’t get to you in a few weeks.’ There was a lot of that and that is gone.”

Other challenges exist as well, and have increased with the economic challenges of the past few years.

Kaliner says Power Home Remodeling has grown due to the value proposition it offers homeowners.

“During this recession, and with extensive media coverage talking about negatives going on with the world, it’s more difficult to present this value proposition,” he says.

The other big dilemma facing his company is how to keep up with rising costs.

“Even though inflation has been in line in general, our industry has not kept up with inflation,” he says. “Raw materials costs are on the rise … and we have to pay our people well, so costs are changing.”

For Stokes, his biggest challenges go back to that “patient” consumer. He says it forces companies to stay on the top of their game, particularly for sales staff.

“I’ve got a brother-in-law who was a remodeler and he has had to sharpen his old skills,” says Stokes. “He never had to follow up before. You have to be very good now. Five years ago we didn’t have Angie’s List. The consumer now knows where to go to check up on you. You can’t hide anymore.”

"If I were a building products manufacturer I would be looking at what in my product line targets this comfort remodeler. I would be promoting things that are cost effective and the comfort aspects of them."
—Joe Emison, BuildFax

Rising to the Occasion
Stokes adds that the above scenario can hurt some companies, but help others.

“Our salespeople have to be aware and be prepared,” he says. “My number-one competitor is the guy who saw the homeowner that I didn’t see. I don’t want to miss out on a chance with a consumer because someone said something negative about us.”

Stokes says he continually pushes this message to his salespeople: everyone has to be in the game.

Though there are challenges, Stokes says those who focus on education will come out ahead.

“The consumer is much smarter now as a result of downturn,” he says. “Five years ago consumers didn’t know as much. But now they really study. If a reputable company employs a business model focused on educating the consumer he will win all the time.”

Power Home Remodeling may join K.C. as one of those companies. Power has been growing steadily since its inception, but for the last three or four years it has grown rapidly as it has expanded into other territories.

Kaliner says the new construction boom has actually helped create opportunities for his remodeling company.

“During the new construction boom many companies used inferior products, which now allow for upgrades,” he says.

The tax credits was a vehicle that helped foster those upgrades.

“The government gets blamed for a lot of things but they were instrumental in helping our industry as a whole with the $1,500 tax credit. A lot of companies went out of business, and the credit certainly helped us. This year we do miss it. It has affected our conversions a little bit and we would love to have it back,” says Kaliner.

Stokes says the tax credit was the single best marketing tool in the industry.

“I don’t think incentives are needed, but I like them because they obviously generate leads and opportunities. It works like a television ad. You didn’t realize you had a problem until you hear about it,” he says.

But, according to Emison, it’s up to window companies and their dealers to sell the consumer on these products.

“I analyze data and if I were running a company that sold building materials, I would be looking at my sales numbers and trying to figure out if there is a difference in the materials I sell,” says Emison.

It is then up to the savvy companies to bring this message to the consumer.

Tara Taffera is the editor/publisher of DWM/Shelter magazine.

DWM
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