Now, a fix-up downturn

Housing slump is proving to be a drag on home improvement.

Posted: August 26, 2007

The housing slowdown and mortgage crisis have finally begun cutting into the remodeling market.

Remodeling activity slowed slightly in the second quarter, according to the National Association of Home Builders' Remodeling Market Index, which measures remodelers' perception of current demand and future activity. An index of 50 or above indicates that most remodelers view market conditions as improving.

In the Northeastern United States, the home-builders association reported, things were a bit better in April, May and June, with the remodeling index climbing to 49.5 from 43.4 in the first quarter.

"While we have experienced some weakening in the remodeling market, activity has remained relatively steady," said Mike Nagel, NAHB Remodelers chairman. "We may have seen a decline in the number of major remodeling projects, however, the market has been buoyed by an increase in the number of homeowners requesting smaller-scale projects and home alterations."

These days, with interest rates rising and credit tightening, fewer homeowners are tapping into equity. According to Freddie Mac, the amount of home equity cashed out through refinancing in the second quarter totaled $76.7 billion, a drop of $24.5 billion compared with the same quarter last year.

"Both the tightening of underwriting standards and slackening house-price appreciation are possible contributing factors to the decline," said Frank Nothaft, Freddie Mac's chief economist.

Fixed 30-year interest rates are hovering around 6.60 percent. While that's just a few basis points higher than in August 2006, it's more that 1.5 percentage points above the rates available during the refinancing frenzy of 2001-2005.

But there is another, more troubling issue here: American families cashed out $1.2 trillion of home equity between 2001 and 2006, which could leave them financially ill-prepared for the future, said Tim Rusch of the nonprofit public-policy organization Demos.

"The impact of this trend is manifold: Families no longer have an asset to turn to in times of emergency, or to cover education, or for support in retirement - a foreboding shift in household security as millions of baby boomers near retirement age," he said.

More families are being pushed to the edge of bankruptcy as their APRs (annual percentage rates) reset and they are unable to make payments on their homes or keep up with other bills, Rusch said. And in locations where the market is flooded with vacant foreclosure properties and sale prices are dropping, many who refinanced can actually find themselves "upside down" in a home.

"In other words, they have borrowed the entire value and owe more on it than it is actually worth," he said.

Not surprisingly, the remodeling market is following the downswing in the overall housing market, said the home-builders association's chief economist, David Seiders. "We expect some further erosion in the second half of this year and in 2008, followed by a gradual recovery in 2009 and beyond."

Woodbury remodeler Jay Cipriani began 2007 with "an aggressive goal" of surpassing the $6.5 million his company made last year by $1 million.

"We had a meeting early [August] to tail back this year's budget to $6.8 million. It's a more cautious market," said Cipriani, whose firm does about 100 large and small jobs every year.

Though remodelers are feeling the pinch, home centers appear to be as full of shoppers as ever. Yet representatives for those store chains were unwilling to comment for this article.

"We are in a quiet period in advance of earnings release . . . so I am not able to talk about sales trends (including shopping habits)," Chris Ahearn, vice president of public relations for Lowe's, said earlier this month.

Thus far, the downturn in the housing market hasn't hurt the profit margins of major appliance manufacturers. Whirlpool, GE and LG Electronics all reported record sales and profits in the second quarter.

But Whirlpool's bottom line benefited from stronger sales abroad. In North America, the company's reported sales were down 6 percent, to $3 billion, because of lower appliance shipments and softer demand.

Though industry-wide shipments of washers and other major appliances fell 1 percent in North America in the second quarter and 5 percent in the first half of 2007, Whirlpool noted that shipments in the region began to improve in the period, after months of declines. The company still expects U.S. industry shipments to fall 2 percent to 3 percent this year.

Figures from GE and LG included divisions other than appliances, as well as global sales.

From a remodeling-to-sell point of view, owners' attitudes toward having work done before their houses go on the market have changed. Mike McCann, a Prudential Fox & Roach associate broker in Center City, said even sellers planning to list their houses six months to two years down the road are asking his advice.

"It's definitely a change from a couple of years ago, when you couldn't convince them to do anything," said McCann. He mentioned refinishing or installing new flooring, updating appliances, and painting as three upgrades he's seeing a lot of currently.

"We're not seeing people refinishing basements or putting in kitchens and bathrooms, which is something that a seller shouldn't do in any real estate climate," McCann said. "It's cosmetics, pure and simple."

So, with sellers making cautious improvements before they list their houses and anecdotal evidence from the home centers indicating that more homeowners are doing their own work, where does this leave the remodeler?

"It is a more difficult market," said Cipriani. "Our clients are still spending $50,000 on a bathroom or a kitchen, but most are not willing to spend a couple of hundred thousand on an addition."

On at least three occasions recently, Cipriani said, his estimators have reported that "customers have been delaying the start of jobs because they are looking for money."

He has a sense, he said, that lenders are tightening underwriting standards for refinancing and personal loans, and that the easy money that was around even nine months ago just isn't there anymore.

"Right now, we're hoping for the same amount of business as last year, or a little bettter," Cipriani said. "We just can't be as aggressive in our estimates as we were at the beginning of the year."


Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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