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The home improvement business is finally catching the housing virus. Remodeling and repair actually received a boost in the early phases of the housing slump as many owners opted to upgrade their current digs rather than sell and move in a softening market. Still others fixed up their second homes and investment properties to make them more attractive to prospective renters.
But the stimulus from both trends has now faded. Making matters worse, a typical source of cash for remodeling -- home equity lines of credit -- is drying up. Banks are getting pickier about making such loans.
David Seiders, chief economist with the National Association of Home Builders, says, "Remodeling is not countercyclical. We're starting to see a setback." In fact, falling to flat home prices, which are a reality in much of the country, make people nervous about investing more money in their home.
Homeowners see houses in their neighborhood selling for less than a year ago, fueling concern that owners won't recoup much of the cost of a remodeling project when it eventually comes time for them to move on. Meanwhile, the rapidly slowing pace of home sales is slashing demand for the kinds of early projects typically accomplished by new buyers. As things stand now, total spending on home improvements is on track to dip about 2% this year and 6% in 2008.
Projects most likely to be postponed: Room additions and renovations of kitchens and bathrooms. Spending will be more stable on maintenance work such as new roofs and siding. But such work is only about a third of the total spent on improvement, leaving plenty of slack in the market.
Of course, there is a bright spot for homeowners: After years of chasing after busy contractors, owners will be able to nail them down much more easily, and contractors will be more amenable to negotiating prices.
Kermit Baker, director of the Remodeling Futures Program of the Joint Center for Housing Studies at Harvard University, says that recent declines in both short-term and long-term interest rates should help to put some canceled remodeling projects back on track. But what the market really needs are homes that are appreciating in value. He notes, "Nothing indicates that there will be a quick turnaround" in that department.
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