Kermit Baker is a senior research fellow and director of the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University, www.jchs.harvard.edu.
REPLACEMENT CONTRACTOR: What are the prospects for the remodeling/replacement segment of residential construction in 2008?
KERMIT BAKER: Firms that saw a slower '07 are, in all likelihood, going to see a slower '08. It's a continuation of the problems we're seeing in broader residential markets. Home prices are flat in metro areas, underwriting standards are tighter because of credit problems, and households are hesitant to undertake extensive home improvement projects in this economic environment.
RC: How regional is this?
KB: So far it's been somewhat regional. The first place we saw a slowdown was in the industrial Midwest — Michigan, Ohio, Indiana — which are affected by what happens in the auto industry, and manufacturing activity generally. That began in 2005 and has continued. Those folks may see a bit of a rebound in '08, though it's too early to tell. A second slowdown began in '06 and that was in markets that had seen a rapid overheating in housing prices: Phoenix and Las Vegas, and California, coastal Florida, and the Northeastern seaboard.
RC: How does the current situation compare with previous downturns?
KB: They're all a little bit different. So far, this one doesn't look to be as severe. On the other hand, it could be as long as other ones. My best guess is that the remodeling market turned negative in mid-'07 nationally and we could see four, five, or six quarters of modest decline in spending over that period.
RC: Ending when?
KB: It may be the end of the year before we start to see a pickup in home improvement spending. That's a rough guess.
RC: Who is most at risk?
KB: Design/build firms have done the best in the last five years and are fairly vulnerable to a downturn. After that, specialty contractors and, lastly, general remodelers — the kind of company that can do a kitchen one day and a window replacement project the next.
RC: What are the positives?
KB: Well, it doesn't look to be a sharp downturn. It looks to be one that a lot of companies can get through if they pay attention to the details, make sure they do good work, and focus on customer assistance. The good news is it's happening while the economy is still relatively strong. And remodeling has the ability to bounce back much more quickly than new-home construction because you don't have this inventory overhang in remodeling. So once conditions start to improve, you will see an almost immediate improvement in overall activity levels.