Residential Remodeling Market Trends and Outlook Kermit Baker Remodeling Futures Conference April 3, 2012
Remodeling Market Overview 1. Home improvement spending totaled an estimated $290 billion last year; weak house prices and low levels of home equity financing still drags on market growth. 2. Recent shifts in the housing stock have increased the importance of rental units and distressed properties as sectors expected to generate share gains in home improvement spending. 3. Remodeling activity appears to be recovering, and spending is expected to gain momentum in second half of year.
With the BuildFax Rebenchmarking, there is Greater Consensus in the Estimates of the Health of the Home Improvement Market Percent change in Q4-2011 as compared to Q4-2010 10% 7.1% 5% 25% 2.5% 0% -5% -2.5% -4.0% -6.8% -10% Census BuildFax HIRI Han-Wood RRI NAHB RMI Notes: NAHB number calculated as percent below neutral score of 50. Sources: BuildFax Residential Remodeling Index, Home Improvement Research Institute Consumer Sentiment Tracking Study, U.S. Census Bureau C-30 series, Hanley-Wood Market Intelligence Residential Remodeling Index, and NAHB Remodeling Market Index.
Though Still Below Its Peak, Estimated Home Improvement Spending Approached $300 Billion Last Year Improvement and maintenance and repair expenditures (Billions of dollars) 350 326 300 280 52 286 280 290 250 200 150 100 50 149 161 41 40 108 121 180 44 136 229 210 57 48 162 172 49 231 274 54 49 232 231 49 240 0 1995 1997 1999 2001 2003 2005 2007 2009 2010 (e) 2011(e) Owner-Occupied Homes Rental Units Sources: JCHS tabulations of the 1995-2009 American Housing Surveys (AHS); U.S. Department of Commerce Survey of Expenditures for Residential Improvement and Repairs (C-50); and Estimating National Levels of Home Improvement and Repair Spending by Rental Property Owners by Abbe Will, JCHS Research Note N10-2, October 2010.
Factors Influencing Remodeling Spending - Sales of distressed homes continue to put pressure on house prices, and weak house prices are limiting homeowner willingness to undertake improvements; - Much of the growth in the housing stock is on the rental side; - Home energy costs are key determinant of energy efficiency investments, but energy prices are very dependent on source; - Home equity credit financing continues to decline; - Construction industry continues to attract new entrants, limiting the ability of contractors to increase the scale of their operations;
House Prices Remain Weak, and Haven t Yet Begun to Recover in Many Markets Across the Country Single-family house price index (Jan. 2000 = 100) 210 200 190 180 170 160 150 140 130 Source: CoreLogic HPI, January 2012. 6
Held Back in Large Part By Sales of Distressed Properties Index Value (Jan. 2000 = 100) 210 200 190 Single-Family HPI Single-Family HPI - Excluding Distressed 180 170 160 150 140 130 Source: CoreLogic HPI, January 2012. 7
Although Trends are Improving, the Number of Distressed Properties Remains Elevated Millions of loans (not seasonally adjusted) 5.0 4.0 Loans Past Due 90 Days Loans in Foreclosure at End of Quarter 30 3.0 2.0 1.0 0.0 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 Source: JCHS tabulations of Mortgage Bankers Association, National Delinquency Survey data. 8
Net Household Growth in Recent Years Has Been Dominated by Renters Change in Households (Millions) Homeownership Rate (Percent) 4.0 70 3.0 69 2.0 68 1.0 67 0.0 66-1.0 2003-5 2005-7 2007-9 2009-11 65 Homeowners Renters Homeownership Rate Source: JCHS tabulations ti of U.S. Census Bureau, Housing Vacancy Surveys. 9
U.S. Crude Oil Price Increases are Generating Concerns About Future Home Energy Costs Dollars per gallon for West Texas Intermediate crude oil 3.50 300 3.00 2.50 200 2.00 1.50 1.00 0.50 0.00 Source: U.S. Energy Information Administration i ti Short-term t Energy Outlook, March 2012. 10
However, Over Same Period, New Supplies Have Caused Natural Gas Prices to Fall Dollars per gallon, crude oil Dollars per thousand cubic ft., natural gas 3.50 300 3.00 Crude oil (left axis) Natural gas (right axis) 12 10 2.50 8 2.00 1.50 1.00 +14% -42% 6 4 0.50 2 0.00 0 Source: U.S. Energy Information Administration Short-term Energy Outlook, March, 2012 11
Home Equity Lending Continues to Ease Home equity lines of credit and loans, amount outstanding at end of period Levels of home equity loans outstanding, trillions of $ Changes in levels, billions of $ 1.5 1.0 65.1 113 1.13 112 1.12 1.03 0.95 0.93 0.90 0.89 0.87 50 0.5 0.0-0.5 2007 2008 2009 2010 2011-1 2011-2 2011-3 2011-4 -18.0 0-1.0-1.5 Total outstanding ($T) Change over period ($B) -65.0-62.2-50 -2.0-82.3-90.6-97.0-84.5-100 Sources: Federal Reserve Board, Flow of Funds Accounts, Q-4, 2011; Tables F.218 and L.218.
Construction Has Historically Been the Sector with the Highest Rate of Entrepreneurial Start-Ups t Kauffman Foundation Index of entrepreneurial activity; (% of individuals age 20-64 starting a business that month) 1.8% 1.6% 1.4% 1.2% Construction Manufacturing Ttl Total 1.0% 0.8% 0.6% 0.4% 02% 0.2% 0.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: Kauffman Index of entrepreneurial activity 1996-2011; March, 2012.
Though Remodeling Industry Became More Fragmented During Downturn, Number of Large Firms Apparently Increased Number of residential remodeling general contractor establishments with payrolls Employment Size 2003 Number 2003 Share 2006 Number 2006 Share 2009 Number 2009 Share 4 or fewer 44,414 80.1% 78,800 80.0% 70,918 83.6% 5-9 6,481 11.7% 12,055 12.2% 8,560 10.1% 10-19 2,887 5.2% 5,094 5.2% 3,462 4.1% 20-99 1,406 2.5% 2,288288 2.3% 1,507 1.8% 100-499 113 0.2% 162 0.2% 160 0.2% 500 or more 133 0.2% 81 0.1% 247 0.3% TOTAL 55,434 98,480 84,854 Source: U.S. Census Bureau, Statistics of U.S. Businesses, County Business Patterns Data.
Recent Changes in the Housing Stock
Almost 15% of the Housing Stock (19 million units) Doesn t Have a Permanent Occupant 2011 national housing stock, millions Held Off Market, 73 7.3 Seasonal, 4.5 Vac-for Rent/Sale, 7.0 Owner-Occ, 75.1 Renter-Occ, 38.4 Total housing stock = 132.3 million units Source: 2011 U.S. Census Bureau Housing Vacancy Survey.
During Downturn, Net Additions to Housing Stock Heavily Concentrated Among Rental Units; Units Held Off Market 2.0 1.5 1.0 0.5 Net additions to the housing stock, annual averages, millions Owner Rental Vacant Seasonal Held off 1.47 0.1 1.27 01 0.1 0.1 0.2 0.3 0.1 0.9 1.0 116 1.16 0.3 0.1 0.1 0.7 00 0.0-0.5 1990-1995 2000-2005 -0.1 01 2006-2011 Normal Boom Bust Source: U.S Census Bureau Housing Vacancy Survey; 2000-2011 figures from revised series.
Rental Market Has Played Key Role in Absorbing Single Family Homes Since Housing Bust Net conversions from owner to renter occupancy (millions of units) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 02 0.2 0.0-0.2-0.4 14 1.4 08 0.8 0.6 01 0.1 (0.2) 1999-2001 2001-03 2003-05 2005-07 2007-09 Note: All structures also includes attached single-family homes and mobile homes. Source: JCHS tabulations of U.S. Department of Housing and Urban Development, American Housing Surveys, using JCHS-adjusted weights.
Improvement Spending on Rental Units
The Stock Has Been Getting Older, But in Recent Years The Average Age of Rental Units Has Increased More Median age of the occupied housing stock in years 40 35 30 Rental Units Owner Units 32 29 35 31 38 34 25 23 25 20 1985 1989 1993 1997 2001 2005 2009 Sources: American Housing Survey, 1985-2009.
While Improvement Spending Increased for Owner Units Over the Past Decade, It has Remained Stable for Rental Units Average annual remodeling spending per unit, $ $4,000 $3,000 Rental Owner $2,000 $1,000 $0 2001 2003 2005 2007 2009 2011 Sources: JCHS tabulations of the U.S. Department of Commerce Survey of Expenditures for Residential Improvement and Repairs (C- 50); Value of Private Construction Put in Place (C-30); Housing Vacancies & Homeownership Rates; 2001-2009 American Housing Surveys and Estimating National Levels of Home Improvement and Repair Spending by Rental Property Owners by Abbe Will, JCHS Research Note N10-2, October 2010.
As a Result, the Rental Share of Home Improvement Spending Has Been Declining i Rental share of total residential remodeling spending 30% 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: JCHS tabulations of the U.S. Department of Commerce Survey of Expenditures for Residential Improvement and Repairs (C- 50); Value of Private Construction Put in Place (C-30); Housing Vacancies & Homeownership Rates; 2001-2009 American Housing Surveys and Estimating National Levels of Home Improvement and Repair Spending by Rental Property Owners by Abbe Will, JCHS Research Note N10-2, October 2010.
Distressed Properties
Distressed Sales Comprise 35% of Market Distressed Share of Existing Home Sales Market (Through Jan, 2012) Source: National Association of Realtors, Realtors Confidence Index Report, Jan 2012 Edition Based on Data Collected Through February 5, 2012. 24
At Present, Many Distressed Sales are to Investors and Other Absentee Owners Mt Metro Area Est. Number of Single Family REO Sl Sales to Absentee Owners, 2011 Share of Single Family REO Sales to Absentee Owners, 2011 Detroit Warren Livonia, MI 28,200 75% Phoenix Mesa Scottsdale, AZ 18,900 39% Chicago Naperville Joliet, IL IN WI 12,000 62% Las Vegas Paradise, NV 10,300 42% Riverside San Bernardino Ontario, CA 9,500 31% Miami Fort Lauderdale Pompano Beach, FL 7,400 43% Los Angeles Long Beach Santa Ana, CA 6,600 30% Dallas Fort Worth Arlington, TX 6,300 33% Houston Sugar Land Baytown, TX 6,200 38% Sacramento Arden Arcade Roseville, CA 5,200 36% Notes: Detached Single-Family homes only. REO sales are defined as the first subsequent arm s length transaction after the foreclosure. Based on approximately 800,000 detached single-family REO sale closings in 2011. Source: Preliminary i estimates t from Hanley Wood, Housing Intelligence Pro Database.
Contractors Report Significant Pre-Sale and Post-Sale Expenditures on Distressed Properties Client category Avg. Amount Spent on Repair & Improvement Projects By banks/institutions/sellers to prepare foreclosed homes for sale $5,100 By households/investors/purchasers after short sale, homeowner default or bank foreclosure $7,300 Source: The Farnsworth Group, JCHS Green Remodeling Survey of Remodeling Contractors, February, 2012. 26
Fannie Mae Spent Almost $600 Million Preparing Distressed Home for sale Last Year Fannie Mae Foreclosed Property and Repair Spending Statistics 2010 2011 REO Sales 186,000 244,000 Number of Properties Sold w/ Repairs 87,000 90,000 Avg. Repair Spending on Sales w/ Repairs $5,600 $6,200 Total Repair Spending on Sales $487 Million $560 Million Source: Fannie Mae Repair Spend data, Fannie Mae 2011 Annual Report, and A Report on Fannie Mae s Mission Activities, April 2011.
Majority of Pre-Sale Spending: Replacement Items and Routine Repairs Repair Item Repair Spending (Millions $) Share of All Repair Spending Interior Painting $110.3 26% Carpeting $65.1 15% Carpentry (Interior/Exterior) $49.1 12% Plumbing $32.0 8% HVAC $28.9 7% Roofing/Gutters $20.9 5% Appliances - Materials $14.1 3% Electrical $13.2 3% Other Structural $11.1 3% Source: Fannie Mae Repair Spend data through third quarter of 2011. 28
Total Spending on Distressed Properties Totaled an Estimated t $8.5 Billion Last Year Distressed Property and Repair Spending Statistics No. % Sales With Avg. Expend. Est. Total Distressed Repairs/ /Unit Market Sales Improvements Spending Pre-Sale 1.0 million 37% $6,200 $2.3 billion Post-Sale 15million 1.5 57% $7,300 $6.2 billion Total $8.5 billion Source: Fannie Mae 2011 Annual Report; 2009 AHS Survey; The Farnsworth Group, JCHS Green Remodeling Survey of Remodeling Contractors, February, 2012. Note: The share of recent sales with repairs/improvements is based upon responses from owner-occupants who were recent buyers in 2009, and does not adjust for purchasers of REO sale properties p who were absentee owners. 29
Outlook for Home Improvement Spending
Planned Spending on Home Improvements Down Recently, But Trend Remains Unusually Volatile Quarterly averages compared to year-ago level for planned spending 15% 10% 5% 4.9% 7.2% 5.3% 10.4% 0% -5% -2.3% -3.2% -4.0% -2.5% -3.8% -10% -8.4% -9.2% 92% -15% -20% -14.9% Note: Quarterly figures are 3-month averages centered on middle of quarter and normalized per 100,000 responses; Third Quarter 2011 estimate based on July and August data only. Source: JCHS tabulations of the Home Improvement Research Institute s monthly Consumer Sentiment Tracking Study, Feb. 2008 Aug. 2011.
Preliminary Estimates of Leading Indicator of Remodeling Activity Point to Healthy Upturn in Second Half of Year Homeowner Improvements Four-Quarter Moving Totals Billions of $ Four-Quarter Moving Rate of Change $130 10% 5.9% $125 $120 $115 $110 $118.3 $115.7-8.0% $111.8 $112.0-6.7% -7.6% 1.0% -1.1% -4.2% $113.4 $114.5 $112.9-0.4% -2.2% $111.6 $110.8 3.8% -0.2% 02% 0.8% 01% 0.1% -0.6% -1.1% $114.2 $113.8 $115.8 $110.2 $113.0 $113.9 $122.6 5% 0% -5% -10% -10.5% $105-15% $100 2009-1 2 3 4 2010-1 2 3 4 2011-1 US Census Bureau 2 3 4 2012-1 LIRA 2 3 4-20%