Remodelers are already beginning to see dramatic reductions in their average job sizes. Some of this can probably be chalked up to softening of the housing market — homeowners were more likely to pour hundreds of thousands of dollars into their houses when home values were skyrocketing. An additional factor, Baker says, is that the industry is returning to more “broad-based participation.”
During the boom years, Baker says, “remodelers were cherry-picking their prices. Middle-income households were told to call back in six months,” he continues, or they received bids on their jobs that were too high for them to afford.
Data from the American Housing Survey reported that the number of homeowners reporting home improvement expenditures dropped 11% from 1995 to 2003. As a result, spending by the top 5% of spenders increased 25% during that same time period. In 2005, that group accounted for better than 60% of all remodeling spending. “There were a few households spending a lot, as opposed to many households spending a little,” Baker says, characterizing that situation as “dangerous” for the industry.
SLOW GROWTH As would be expected in a flagging market, remodeling contractors are experiencing declines in their financial performance. JCHS tabulations of Qualified Remodeler magazine’s Top 500 list of the firms with the largest annual volumes shows that these companies are growing at a much slower rate than they were a few years ago. Using data from the 400 largest companies that reported volume numbers for consecutive years, JCHS found that the median annual growth rate for these remodelers last year was 4.7%. In 2004, that number was 12.4% — meaning that the growth rate has slowed more than 60% in just two years.
While too much shouldn’t be read into that statistic — these firms are still growing, after all — it does hint at implications for smaller companies. If large remodelers aren’t growing, smaller ones may see more volatility in their own performance.
Smaller companies may not just be increasingly stagnating; they may be going out of business at a faster rate. Data from the U.S. Census Bureau reveals that 22% of all remodeling companies with payroll expenditures of less than $30,000 — which Baker says roughly corresponds to less than $100,000 in annual volume — ceased operations in 2004, including nearly a quarter of companies that size that opened in 2003. This data is not available for previous years, but Baker says that “those struck me as high numbers.”
Most recent estimates suggest that things will start to turn up in 2009. Though this date keeps getting pushed back, Baker says that there is reason to be optimistic that these predictions are closer to correct. The extension of the downturn was due in large part to the mortgage crisis, which Baker says was unforeseeable. “People saw that some folks were over-extended, but I don’t remember anyone saying six months ago that it would drag down the entire residential sector,” he says. Barring another surprise like that one, things should get better in another year or so — and that, at least, is good news.
Source: Joint Center for Housing Studies