Homeowners are spending fewer dollars on remodeling and renovation projects. This living room makeover completed by Holden-based Woodmeister Master Builders in May was part of a penthouse condo renovation in Boston.
Home improvement is getting hammered.
Spending on remodeling projects is expected to total $173.6 billion by the end of the year, a 2.3 percent decrease from 2006, according to the Joint Center’s Leading Indicator for Remodeling Activity. That would be the first drop in home improvement expenditures since late 2003.
Experts say falling home prices, slower sales and tighter lending standards are squeezing a once red-hot industry.
“There are several factors that have been negative for a while and will continue to be negative – those are things like home sales [and] contractors’ sentiments,” said Kermit Baker, director of the Joint Center’s Remodeling Futures Program. “There hasn’t been much change there. That continues to be a drag.”
In recent months, the remodeling industry also has been hurt by the credit crunch. Baker said problems in the credit markets are reducing the level of cash-out mortgage refinancing – a key source for funding home improvements in the past.
In the past three years, a record number of homeowners took advantage of low interest rates and home equity gains to refinance mortgage loans. A significant number extracted equity and used that money for property renovations. Studies have shown that as much as 35 percent to 40 percent of those resources have gone toward home repairs and upgrades, according to Baker.
Baker said it was easier for homeowners to refinance and take money out of their homes for such projects. “Now it’s harder to do that,” he noted.
Locally, smaller remodeling companies are feeling the pinch.
“We’ve had a very, very slow year,” said Chuck Hall, president of Cornerstone Building & Design in Framingham.
Hall estimated that business is down by 30 percent from a year earlier. “It’s the worst year we’ve had in about six years,” said Hall, who is co-chairman of the Builders Association of Greater Boston’s Custom Builders and Remodelers Council.
Many homeowners were willing to spend money on remodeling projects as they saw home values escalate, according to local builders. Statewide, the median home price jumped 72.5 percent from $200,000 in 2000 to $345,000 in 2005, before declining 5.8 percent to $325,000 in 2006. The median selling price through September of this year is down to $315,000, according to The Warren Group, parent company of Banker & Tradesman.
With the dip in prices, some homeowners are hesitating to spend hefty amounts on renovations, Hall said. “It makes it a little hard for people to consider putting too much money into [their homes].”
Hall’s business slowed so much this year that he had to lay off a project manager and take smaller home-repair jobs – such as window replacements.
‘One of the Worst’
Cape Cod builder Rob Padgett said he started seeing business ease in the fall of last year. Business was so much slower that he laid off two workers in September, eventually rehiring one of them this month.
In a typical year, Padgett’s Cotuit-based company pulls in $1.6 million to $1.8 million in sales. But in the last 10 to 12 months, that figure has dropped to between $900,000 and $1 million.
“In the last 10 months to a year, it’s been one of the worst years I’ve had in the last 10 years,” said Padgett, owner of Padgett Builders.
However, Padgett, who recently signed a contract to complete a $700,000 renovation of a Hyannisport home, said he expects to rake in 60 percent more by next year.
The Cape’s remodeling industry differs from other parts of the state because the region is a destination community for retirees, according to Padgett.
As such, much of the remodeling activity is driven by consumers who are relocating and are spending hundreds of thousands of dollars for complete home remodels.
Business boomed when the housing market was robust and properties were selling quickly. During those years, people who had a second home on the Cape – and were planning to retire there – were more willing to invest in renovations before their primary residence was even sold, said Padgett.
“They had a tendency to spend the money knowing that they could sell their home. When the market slowed off-Cape, some people started pulling back Â… because the cash flow was shut off,” he said.
Remodelers on the Cape said they are expecting business to get a boost from aging baby boomers who don’t want to postpone their retirement plans.
“What we’re seeing is that those people who were hedging before are starting to enter the market again,” he said.
Some firms that cater to affluent consumers aren’t feeling the sting as much. That’s because the credit crunch isn’t affecting many wealthier homeowners.
“In our business, they pay cash for [renovations] they’re doing,” said Philip Bates, a principal of Lexington-based The Classic Group.
Bates estimated that only one out of 20 projects taken on by his company involve bank financing.
The Classic Group, which has completed multimillion-dollar renovations in some of the state’s most exclusive neighborhoods, has a backlog of projects, according to Bates. “We have a few larger projects that take us through 2008,” he noted.
But Bates acknowledged that many other firms are hurting, even those serving wealthy clients. He’s seen custom framers and highly regarded plasterers lay off workers for the first time in 15 years, a sign that remodelers are not delivering as much work.
“In the high-end renovation and new-construction business, there are signs of fewer jobs and more competition for those jobs,” said Bates.
Holden-based Woodmeister Master Builders has seen its profits from remodeling jobs grow. So far this year, Woodmeister’s revenue from remodeling work has increased 15 percent from a year earlier.
Woodmeister, which specializes in luxury homes, as well as custom cabinetry and interiors, also has hired more employees. With more than 150 employees, the company increased its personnel by 12 percent this year, according to Chris Komenda, Woodmeister’s marketing manager. The firm also is seeking to fill nine open positions, including project managers.
“Overall, we have not seen a decrease in earned revenue on our remodeling work. However, as a company focus, we have shifted gears over the past couple of years to increase our new-construction business. We see that as a bigger growth potential to our total earned revenue, as compared to remodeling,” Komenda explained in an e-mail.
