Trends and Outlook for the Remodeling Industry Kermit Baker Remodeling Futures Conference November 7, 2006 www.jchs.harvard.edu
The Remodeling Market Has Almost Doubled in Size Over the Past Decade Billions of Dollars $300 280 $250 210 229 49 $200 $150 $100 149 41 108 161 40 121 180 44 136 57 48 162 172 231 $50 1995 1997 1999 2001 2003 2005 Spending on owner-occupied units Spending on rental units Sources: JCHS tabulations of 1995-2003 American Housing Survey (AHS) and the US Department of Commerce Survey of Expenditures for Residential Improvement and Repairs.
Over Past Decade, Upper-end Projects Have Been Fastest Growing Remodeling Segment Share of Spending on Home Improvement Projects 1995 2005 Property Improvement 19% Upper-end* 21% Property Improvements 16% Upper-end* 32% Exterior 21% Interior Replacements 5% Systems upgrade 18% Other Remodels, Adds. and Alts. 16% Exterior 19% Interior Replacements 9% Systems upgrade 16% Other Remodels, Adds. and Alts. 8% * Upper-end projects defined as kitchen remodels of $10,000 or more, bath additions and remodels of $5,000 or more, and room additions of $25,000 or more in 2005$. Source: JCHS tabulations of 1995 and 2005 AHS.
A Perfect Storm for Remodeling Rising house prices High turnover rates for existing homes Low financing costs Income growth concentrated at upper-end of income distribution Nesting post 9/11
Recent Trends in Remodeling-Related Indicators Remodeling Drivers: - existing and pending home sales Remodeling Specific: - payrolls at general remodeling contractor firms - remodeling market index (NAHB)
Existing and Pending Home Sales also are Slowing Millions of home sales, annualized rate Index: 2001=100 6.4 6.3 63 6.3 130 6.2 6.0 5.8 5.6 54 5.4 6.0 123.3 126.2 126.7 6.1 120.6 6.0 117.2 5.9 113.0 5.5 125 120 115 110 5.2 107.9 105 5.0 2005-1 2 3 4 2006-1 2 3 100 Existing home sales (left) Pending home sales (right) Source: National Association of Realtors
Growth in Remodeling Contractor Payrolls is Easing Remodeling Contractor Payrolls (12 mo. moving avgs. - 000s) Annual Growth Rate 300 10% 289.9 281.8 282.9 283.5 284.7 285.7 277.3 280 272.7 8% 267.3 7.8% 261.3 258.5 7.1% 7.3% 260 6% 240 5.2% 4.6% 60% 6.0% 5.9% 4.0% 4% 220 200 2.7% 2.5% 1.4% 2004-1 2 3 4 2005-1 2 3 4 2006-1 2 3 2% 0% Employees Ann. % chng. Source: U.S. Department of Labor Current Employment Statistics
NAHB Remodeling Market Index Recently Has Been Easing Diffusion indexes of current conditions and future expectations, seasonally adjusted 56 54 52 53.6 52.9 52.4 52.8 50.9 51.8 50 48 46 46.6 47.5 48.1 48.9 45.6 47.8 45.7 44 43.5 42 2005-1 2 3 4 2006-1 2 3 Current Conditons Future Expectations Source: NAHB
Until Recently, RMI for Major Projects Has Been Weaker Than for Minor Projects Diffusion indexes for major and minor projects, seasonally adjusted 56 54 52 50 48 46 44 42 40 52.8 53.0 50.2 50.2 49.3 48.2 49.0 45.9 45.3 45.7 44.3 40.6 2005-1 2 3 4 2006-1 2 3 Major projects (>$25,000) Minor projects (<$25,000) 51.0 47.3 Source: NAHB
After Strong Growth, RAI points to Homeowner Remodeling Easing to Single-Digit g Growth Rate Homeowner Remodeling Activity Billions of $ Annual Rate of Change 4-quarter Moving Totals $180 $170 $160 $150 $140 $130 $120 $110 $100 $90 $80 $178.2 $166.3 $170.1 $158.0 $160.5 $148.7 $150.8 $143.44 $127.2 $133.3 19.6% 20.4% 18.6% 18.5% 18.2% $123.5 15.9% 14.4% 8.3% 1.5% 5.1% 1.6% 2004-1 2 3 4 2005-1 2 3 4 2006-1 2 3 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: U.S. Census Bureau and Joint Center for Housing Studies.
Remodeling Sectors Strongest at Present % of respondents reporting improving minus % reporting weakening ; Q3:2006 and Q3:2005 Remodeling: Adds, Alts 41 46 Remodeling: Kitchen, Bath Townhouse/Condo 8 27 32 43 Custom/Luxury Homes -1 10 Move-Up Homes -8 18 Second/Vacation Homes -14 12 First-Time Buyer / Affordable Homes -30-18 -40-20 0 20 40 60 Source: AIA Home Design Survey 2005 2006
Leading Indicator for Remodeling Activity Points to Slower Growth Homeowner Remodeling Activity Billions of $ $190 $170 $158.0 $170.1 $166.3 $178.2 $161.5 Annual Rate of Change 4-quarter moving totals $165.0 $163.8 $165.2 40% 30% $150 $143.4 $148.7 $150.8 20% $130 $110 $123.5 $127.2 1.5% 5.1% $133.3 8.3% 19.6% 20.4% 18.6% 18.5% 15.9% 14.4% 4% 18.2% 2.2% -0.8% -3.7% -7.3% 10% 0% $90 2004-1 2 3 4 2005-1 2 3 4 2006-1 2 3 4 2007-1 2-10% Source: Joint Center for Housing Studies.
Trends in Organization of Remodeling Contractor Businesses
Number of Remodeling Contracting Businesses Grew Significantly Between 1997 and 2002 Number of remodeling contractor establishments with payrolls plus selfemployed contractors with revenues of $25,000 or more (000s) 600 500 400 300 200 100 0 401.6 267.3 134.3 Special Trade General 530.2 320.1 210.1 1997 2002 Note: 1997 figures include the estimated number of nonemployer partnerships and corporations serving the remodeling industry Source: Unpublished tabulations of the 1997 and 2002 Economic Census.
Self-Employed Remodeling Contractors Increased Faster than Firms with Payrolls Between 1997 and 2002 Number of remodeling contractors with payrolls plus self-employed contractors with revenues of $25,000 or more Number of Businesses 1997 2002 % Change General Contractors Payroll 62,400 82,900 +33% Special Trade Self-employed 71,900* 127,200 +77% Total 134,300 210,100 +56% Payroll 109,100 117,200 +7% Self-employed 158,200* 202,900 +28% Total 267,300 320,100 +20% Total 401,600 530,200 +32% * Note: 1997 figures have been adjusted to include the estimated number of nonemployer partnerships and corporations serving the remodeling industry that were included in figures for 2002 Source: Unpublished tabulations of the 1997 and 2002 Economic Census.
General and Special Trade Remodeling Contractors Dominated by Smaller Businesses Share of Establishments with Payrolls General Special Trade 11.0% 1.1% 21.2% 11.2% 7.3% 0.7% 26.7% 14.0% 19.8% 19.7% 33.2% Annual Revenue (000s) Less than $100 $100 - $249 $250 - $499 34.3% 3% $500 - $999 $1,000 - $4,999 $5,000 or More Source: Unpublished tabulations of the 2002 Census of Construction.
General Remodeling Contractors and Special Trades Establishments Average Similar Size $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $816 $578 $542 $538 $549 $452 $433 $382 $357 $231 General Remodeling Drywall Insulation Roofing Siding Plumbing, Heating, AC, Electrical All Special Trades Flooring, Tile Framing Finish Carpentry Painting Averagee 2002 Revenue (000s), Payroll Establishments Source: Unpublished tabulations of the 2002 Construction Census.
Average Receipts per Employee Higher for General Contractors than for Special Trades Average Net Billings Per Employee $80,000 $70,000 $60,000 $50,000000 $71,300 $60,900 $57,100 $55,900 $55,600 $55,200 $54,300 $50,200 $46,100 $45,100 $40,000 $30,000 $20,000 $10,000 $0 General Remodelin g Plumbing, Heating, AC C, Electric Framin g All Specia al Trades Sidin ng Roofin ng Flooring, Til le Finish Carpentr ry Drywall, Insulatio on Paintin g Source: Unpublished tabulations of 2002 Construction Census.
Remodeling Contracting Businesses in South Slightly Larger; Slightly Smaller in Midwest Number of remodeling contractors with payrolls, and average revenue General Contractors Special Trade Number of Firms Average Revenue (000s) Number of Firms Average Revenue (000s) Northeast 17,600 530 26,700 350 Midwest 20,600 460 28,000 330 South 23,200200 540 35,300300 370 West 21,000 520 27,200 350 Total 82,900 510 117,200 350 Source: Unpublished tabulations of 2002 Census of Construction.
Larger Firms Generate Most Employment and Revenue for Industry General Remodeling Contractor Share of Payroll Establishments, Employment and Billings, 2002 40% 37.8% 35% 33.1% 30% 29.9% 25% 20% 15% 10% 21.2% 7.2% 17.7% 9.9% 19.7% 16.2% 12.6% 13.9% 17.7% 17.8% 11.0% 11.3% 19.4% 5% 0% 2.4% 11% 1.1% Less than $100 $100 - $249 $250 - $499 $500 - $999 $1,000 - $4,999 $5,000 or More Annual Revenue (000s) Share of Establishments Share of Employment Share of Billings Source: Unpublished tabulations of 2002 Census of Construction.
Remodelers More Fragmented Than Other Residential Industry Players Share of total revenue by top businesses 60% 50% 40% 51.5% 48.4% 4% 45.3% 42.0% 35.4% 30% 25.1% 20% 10% 0% 1.4% 2.1% 3.3% 52% 5.2% 10.0% 15.4% Remodeling General Building Material Wood Product Contractors Supply Dealers Manufacturers Top 4 Top 8 Top 20 Top 50 Source: Unpublished tabulations ti of the 2002 Construction ti Census, and 2002 Censuses of Retailers and Manufacturers.
In Spite of Strong Growth, Gains Have Been Volatile for Remodeling Firms Compound annual growth rates, top 500 remodelers, 1999-2005 16.0% 60% 14.0% 14.3% 14.8% 12.0% 10.0% 0% 11.7% 11.6% 11.6% 8.0% 6.0% 5.4% 6.6% 5.3% 5.5% 5.3% 4.0% 2.0% 0.0% -2.0% 2.7% 1.3% 1.5% 0.8% All Large Firms Design/Build Full Service Specialty Other -0.7% 25th percent. 50th percent. 75th percent. Source: JCHS tabulations of Qualified Remodeler Magazine Top 500 Remodelers, and US Census Bureau Expenditures for Improvements and Repairs of Residential Properties.
Near-Term Outlook for Remodeling 1) Total home improvement activity estimated at $280 billion in 2005 2) Industry indicators point to recent slowdown; slower growth expected for 2007 3) Number of contractor businesses serving the industry has increased to over 500,000 as average revenue per firm has grown very slowly 4) Million dollar contractors generate 40% of employment; almost 60% of revenue