Not long ago, I was confronted in an email by a reader who disagreed with my assessment of the economy as “stormy” in the last issue. Clearly, the recent record shows that the economy at large, and the remodeling market in particular, has been rocking strong, as it has for a record 30 consecutive quarters, and all leading indicators suggest that growth will continue. At face value, my assessment suggested that I am either living under a rock or espousing an alternative reality in order to promote a political point of view. Neither is the case.
To be clear, my assessment was made in a specific context: trying to make sense of the slight downturn in value for all 22 Cost vs. Value projects. There is an easy explanation for why the return on investment—the ratio of value over cost—had dipped: Material costs have climbed steadily for the last seven years, while values have not gained as much, have remained stagnant, or (as they did last year) have gone down. It was this latter trend I was trying to make sense of. I looked to the gradual decline in the consumer confidence index and CEO confidence index, both published by The Conference Board (conference-board.org), for the previous several months as I was writing. I put myself in the shoes of the real-estate professionals who we surveyed to establish the value side, and wondered why, in a real-estate market that has seen record growth in housing sales, they might take a slightly pessimistic view on resale values. I determined that everything is relative.
A year ago, the housing resale market was slammed with a government shutdown and rising mortgage rates, depressing the spring house-selling season. And when real estate started to bounce back, brokers responding to the Cost vs. Value survey, like everyone else, were staring down the barrel of a global trade war, which provoked uncertainty in every sector. This induced the “stormy” comment. Uncertainty causes a storm of fear that depresses spending. The real-estate market in 2019 manifested this as a downturn in the number of homes sold above asking. For real-estate professionals used to prices going above asking in hot markets, as they did in record numbers in 2018, it’s no wonder values were set modestly. Economic news is often unsettling, and we tend to react to it. Instead, we should use it to think strategically. The leading indicators for the remodeling market show positive growth for 2020, but (and this is an important “but”) the rate of growth for remodeling is lackluster at best (2% growth vs. an average annual growth of 5% for those 30 consecutive quarters). That slowdown is what matters. It means that if you take on a lot of expense now to grow your business, you will see a return more slowly than you might expect, and you could be underwater quickly. Now is not the time for heady celebration but rather conservative caution. That’s not a political message.