New Home Insights Podcast Episode 72 Transcript | John Burns Real Estate Consulting

Episode 72: Is the Remodeling Boom about to Go Bust?

 

Transcript

Dean Wehrli:

Welcome to the New Home Insights Podcast, the John Burns Real Estate Consulting Podcast about all things housing. I’m your host, Dean Wehrli. We have covered a ton of topics on the podcast that touch on housing, even maybe a couple that they’re kind of a tenuous connection to housing. But a core housing topic that we have not yet covered is remodeling. Until now, today, we will have a chat with the king of remodeling analyst, I have been told, and I believe and is true, our very own Eric Finnigan from John Burns. We will try not to pitch the discussion in kind of an inside baseball way, but in a way that anybody interested in the housing sector can find some value, but also with enough detail to offer some insights to you folks listening right now who are in the actual remodeling sector. We’re going to talk about the current state and the future of remodeling, some of the causes for some of the shifts that we’re starting to see and that we may see into the near future. So Eric, how you doing?

Eric Finnigan:

Hey Dean. Glad to be here. I’m doing well.

Dean Wehrli:

I’m glad you’re here because I know very little about remodeling, so I’m very glad you’re here. So real quick, why don’t you just give us a little bit of background on you, a little mini bio here and bring us up to date with when you’ve started here at John Burns and then we’ll get right into the meat of it.

Eric Finnigan:

Yeah, so big picture, I started analyzing and forecasting in the housing market in 2007. I joined JBREC about a year ago now, and I focus on remodeling, building products and demographics.

Dean Wehrli:

So let’s start super, super basic, when you say remodeling, what does that space include?

Eric Finnigan:

It includes any work that’s done on the home after it’s built. So after it’s completed and delivered and someone moves in, any structural changes or improvements to the home or to the property would be considered remodeling. It would include also things like major appliances, things that can’t be taken with someone if they move out of the house.

Dean Wehrli:

Okay. Okay. But classically it’s like the siding, the roof, the major kitchen remodeling, plumbing, things like that?

Eric Finnigan:

Exactly.

Dean Wehrli:

We have a pretty broad audience here in the housing sector, why should an audience be interested, if you’re maybe an investor or you’re a real estate agent or someone that works for a builder, why should we be interested in understanding remodeling?

Eric Finnigan:

So I want to just throw out a couple of numbers here. So the number of homes built and sold, new homes built and sold every year in the upper six figure range, low million, number of homes, existing homes sold every year, we get to five, maybe six million on a really good year. The number of remodeling projects that homeowners undertake in a given year is somewhere between 65 and 70 million. So that means that for every homeowner, they are doing some kind of improvement project on their home about every two years. So just the number of potential customers out there, the amount of dollars spent on home improvement exceeds new construction, exceeds any kind of existing home sales figures as well. So it’s just a huge space.

And the other thing is that within the housing sector, I would say it’s one of the least sensitive to the overall economy and to interest rates. And housing is typically seen as the most interest rate sector of the economy, so when the Fed raises interest rates or mortgage rates go up, the housing sector as a whole slows way down. But there’s aspects of the remodeling space that actually are pretty insensitive to the overall economy. So even if we do get a recession next year, there’s parts of the remodeling segment that we think are actually going to be pretty stable. So if you’re a company that’s exposed to the housing cycle, the ups and downs of new homes built or homes sold, I consider investments into the remodeling space as almost a hedge to that real exposure to the ups and downs.

Dean Wehrli:

That’s interesting. So it’s remodeling and movies from the Marvel cinematic universe that are recession proof.

Eric Finnigan:

Yes, exactly.

Dean Wehrli:

Those two critical sectors of our economy. What do you do every day though? I mean, what metrics are you looking at, what data are you using? We’re going to get it into a minute, but you also generate a great deal of data.

Eric Finnigan:

Yeah. So this is one of the reasons I am just fascinated, I love covering the remodeling space, is because it’s so fragmented, it’s actually hard to get really good current data on what’s happening. So we look at remodeling in a few different ways. One is, I’d say top down, meaning we’re looking at spending numbers, we’re looking at overall national activity measures of how many home improvement projects are happening, how many dollars are spent on those. We also look at it from the bottom up, talking to homeowners directly or the professional remodelers that are doing the work, we talk to them. So that’s more of a bottom up approach. And then also sort of a adjacent inference kind of way, there’s maybe not direct measures of the home improvement or remodeling space, but measures that would give you a pretty good idea of what’s happening in the remodeling space.

So if we think, one analogy I came up with here is if you’re looking at a pizza shop and you want to buy this particular pizza shop and you want to know how much to spend for it, and the owner’s not going to give you really good financials, there’s ways of measuring what’s happening. You can look at all the supplies going into this shop, you can look at the number of pizzas going out, you can look at the local population around the shop, you can look at what other pizza shops nearby are going for. There’s some different ways of actually getting to what the value is. And so that’s kind of the interesting challenges, finding these creative and kind of different angles to look at remodeling. And we roll everything up into a big picture national spending number, but again, there’s multiple angles that we cover it. One of, I think, the best ways is actually just talking to the professional remodelers themselves.

Dean Wehrli:

Yeah. But in this pizza shop, for sure do not buy a salad because it’s just quarter wedges of tomatoes, just the stalk of the iceberg lettuce and a lot of olives and they’re just nasty.

Eric Finnigan:

It’s just horrible.

Dean Wehrli:

Let’s go to big picture, let’s talk big picture. Post pandemic was a remodeling boom, and I looked at your last publication and you did kind of a vlog, kind of a video blog, and you said that the remodeling boom is over and we’ll talk about the index in a second. But first, start with that, you’re seeing your measures of remodeling activities start to slide downward.

Eric Finnigan:

That’s correct. So especially if you look at the more forward looking indicators, that if you ask remodelers how many projects they expect to complete through the rest of this year or how far they’re booking out new projects, that’s pointing to some softness really on the horizon. Currently though, the remodelers are still very busy. So if you see, again, comparing different aspects of different segments of the housing market, builders are slowing way down, they’re starting to let some workers go. But in the remodeling space, remodeling crews are still incredibly busy, booked out for months. So again, it’s trying to figure out, okay, what’s volume of new leads coming in, new projects getting signed versus the rate at which projects are getting completed, and you can come up with some pretty good conclusions based on that.

Dean Wehrli:

It’s almost a little bit like the labor market, that the latest labor, the job growth figure was again a good solid positive figure. But economists say universally, that’s a lagging indicator, we know what some of these big employers have already said what they’re going to do and we expect that to drop. So you’re seeing signs that because conditions are still pretty good, but we know it’s going to diminish.

Eric Finnigan:

Right. And that’s kind of going back to those sort of inferential measures, the leading indicators of remodeling and some of those are actually really turning very soft. One thing I can, I don’t want to jump too far ahead here, but just an example, a huge number of remodeling projects are funded through cash out refinance activity. So we know that about 250 billion of cash out, of equity was cashed out of homes last year, it was a huge boost to remodeling and we know that the cash out refinance activity is down about 70% over from last year. So just those dollars available to spend on remodeling is shrinking in a pretty drastic way.

Dean Wehrli:

So one of the main tools you have, one of those data points that you generate yourself here at John Burns, is the index, the remodeling index. Walk me through that and please use really small words that I can understand because I podcast at a third grade level, so in remodeling I’m not going to get everything, so be careful.

Eric Finnigan:

That’s great. Thanks for that. Thanks for that reminder. I sometimes tend to slip into economists speak, I went to grad school for economics. I sometimes think like an economist and I think it’s a really good asset, really good way to think sometimes. And when I’m sort of telling the story, I kind of lose people. So to stop me if I’m using economists speak. So we come up with an index, the goal is to be a one number to look to gauge the health of the remodeling market. The index ranges between one and a hundred, anything above 50 is meant to suggest that the remodeling industry is growing. So there’s a couple of different measures that go into that, there’s three primary measures. One is we ask remodelers to think about the number of projects they completed in the last three months, how does that compare with the quarter a year ago?

So year over year project completions, are they up, are they down, if they’re up by how much, and if they’re down by how much? Next we ask them, over the next three months, do you expect to complete more projects versus the quarter a year ago or less, and if so, by how much? Then we also ask them relative to, quote/unquote, “normal,” what is the homeowner demand for modeling and home improvement today versus normal? So we take those three questions, we come up with indices for each of those, but then also summarize that into one number. And the most recent number covering the third quarter of this year was 62 out of a hundred, which is just on the border between strong and normal.

Dean Wehrli:

So you read that, but you’re leading indicators within that index, within those survey responses, those indicate a year from now we expect things to be slower.

Eric Finnigan:

That’s correct. When we ask remodelers about project completions for the last three months of this year, they actually expect to complete fewer. I mean, that index is falling pretty quickly at this point. It’s still, just by the number itself, it looks okay, but going into normal from such a boom, it feels much weaker.

Dean Wehrli:

And you’re also seeing the backlog start to thin out, people are pushing off or maybe downgrading what they’re going to do.

Eric Finnigan:

Yeah. So again, the number of homeowners that are signing on the dotted line, signing contracts for new remodeling projects, we see that starting to slow down. But then it’s just one remodeling project isn’t the same as the next one or the average project this quarter is not the same as the average project a year ago. So what we’re starting to see is homeowners, if they are signing on the dotted line, an average project a year ago was for the whole interior, for instance, people were feeling flush with cash, home values were going way up, now all of those sort of leading indicators have inflected at this point.

So home values are starting to fall, people are feeling much less wealthy because stock markets are way down, inflation is taking a big bite out of their incomes. So they’re saying instead of doing the whole interior, let’s just start with one room, start with a smaller bite and we’ll add on, we’ll do more projects later and maybe do another couple of rooms in a year from now. But I don’t want to write that $100,000 check, I’m willing to just write say 15 or 20,000.

Dean Wehrli:

So it went from whole house to just a kitchen to, hey, you know what, just the counters, do you know what, let’s just get new mugs.

Eric Finnigan:

That’s correct.

Dean Wehrli:

Okay. Because the new mugs is not helping anyone except for of course our friends at the mug manufacturing basis. Speaking of manufacturers, how are product manufacturers being impacted by this?

Eric Finnigan:

So one thing that has been true for the last say year, is that customers have been more prioritizing what products they can get the quickest. So when they’re in the selection stage, when they’re designing the projects with their design build or their designer, they were saying, “What product can I get here the fastest? And if I have to go above my budget to get it here, okay, that’s fine. If I have to wait just a month for a dishwasher instead of eight months for dishwasher, I’m willing to pay an extra sort of premium on that.” Because inflation has been what it is and because delays are what they are, we’re starting to again see that shift. So customers are no longer, to the same rate, paying up for product availability, and more of their value engineering or picking the product or finishes that fit their budget. So that’s going to be, I think, a big thing that you’ll start to see in the building product manufacturers earning calls, you’ll start to see it with retailers, they were seeing customers trading up and now it’s going to be customers much more trading down.

Dean Wehrli:

Yeah, it makes sense though, because in the new home sector you’ll see when price becomes more of a factor, affordability is more of an issue as it is now. You maybe lessen the spec a little bit, and finishes and features, it makes a lot of sense that would happen in remodeling as well. I mean, how deep does this go? Should we expect a moderate, poorly defined moderate kind of a slowdown here, or could there be a really major put on the brakes kind of a slowdown?

Eric Finnigan:

I think relative to remodeling over the last say decade, coming up is going to feel like a much softer demand environment. It’s not going to be nearly as bad as say the new home market, new construction, if you’re exposed to builders or that type of thing. And then even within remodeling as a whole, so there’s going to be, let’s call it three different segments of the, there’s maybe four, three, let’s call it three for now. There’s the highest end of the market where homeowners are gut renovating and they have basically blank checks, endless amounts of cash to put into their remodeling. The ups and downs of the economy don’t affect this customer nearly almost at all. So those customers are going to kind of continue their projects. There’s going to be a slice of the market that’s going to feel really strong and it’s those that are … they’re not watching what’s even happening in the stock market. They’re definitely not watching what’s happening with the Fed or what’s happening with layoffs at Target or with Facebook or whoever’s laying off. They’re just going to continue-

Dean Wehrli:

High end luxury sector is a little bit just inured to the economy around.

Eric Finnigan:

Yeah, exactly.

Dean Wehrli:

Yeah. Okay. Okay.

Eric Finnigan:

At the absolute lower end, we’ve already seen the sort of mini projects, the more sort of DIY friendly projects start to really slow down and that’s an effect of a lot of those projects were pulled forward during the pandemic. So there was three years worth of DIY remodeling projects that happened in the span of a year, and now those are sort of normalizing. So fewer people are sort of repainting their office or their interior or replacing their shower head or they’re kind of doing DIY friendly projects, as something someone like I could do, and I’m really not handy at all. But then there’s the middle, the bulk of the middle, which is where most of the projects happen and where most of the professional remodeling activity actually occurs. And that segment of the market is really tied to how wealthy homeowners are feeling.

And that’s primarily from stock markets, but it’s also what’s going on with home values. So if they see that their home value is rising, the Zillow price estimate, if they see it go just going up and up and up every month, it’s really easy or relatively easy to spend that, make that huge investment in the home because they know that every dollar that they invest in their home is going to appreciate over time. And that was happening a year ago. Now that price or that home value is now really kind of starting to turn down, so it’s much harder to make those big, big investments. So the big project remodels that are mostly driven by, mostly done by professional remodelers, we think that’s going to contract in a pretty big way this coming year, both in the number of projects but also the amount of dollars spent per project.

Dean Wehrli:

Over the last say, I don’t know, 15 years at least or so, when was the remodeling sector at its white hottest, is it just this post COVID period right here?

Eric Finnigan:

Yeah, so a few things lined up in 2020, 2021, one is that people started to feel, again, very wealthy, there was a ton of cash in people’s checking accounts. Stock markets, I mean I remember seeing at the end of 2020, my 401K, it was like, how is this up year over year? We just went through a once in a hundred year pandemic, how am I wealthier now than I was before? Home values were going way up, but also the time spent in the home was almost 100%, if people were working 40 hours a week or commuting, so out of the house for 50, 60 hours a week before, now they’re spending all their time in their house. And so it’s simple, more time spent in the home equals more spent on the home, and that drove a huge burst of spending.

That seems to be sort of normalizing at this point. Work from home is starting to stabilize at a much higher level than it was pre pandemic. But that shift to spending a lot more time in the home is, quote/unquote, “normalizing” at this point. So I would say the white hot period was end of 2020 to the middle late 2021.

Dean Wehrli:

That’s what I would have thought. Now, so the question becomes then, or at least the caution becomes how does the current market factors and let’s say the factors over the next year or so, how do you think those are going to relate to say 2018/19? That is, do we need to be careful about making comparisons to the whitest hottest market in recent memory and be a little cautious about that?

Eric Finnigan:

Yes. And I’d say it’s really hard to compare anything to what happened in mid 2020 to mid 2021, in so many different areas of the economy, it was just such a strange time, so we’re kind of coming off that now. So remodeling, even though we’re saying the indices are kind of slowing and customers are a little more hesitant about signing on new projects, relative to where it was 2018, 2019, it’s roughly normal. But if you’re comparing it to a year ago, it definitely feels a lot weaker. But there is a couple key differences between now and 2018, 2019. So even though the level of activity might be similar, the direction where it’s heading is much different. And again, that comes down to home values, when home values rise or when home values fall relative to where inflation is, so home values really across the country are falling at this point.

So again, when home values are rising, it’s a huge driver, incentive to spend more on the home, when the home values are falling, it’s the reverse. So people are holding onto dollars and waiting to see the bottom. So I think relative to 2018, 2019 roughly normal, but a year from now, I think it’s going to look a lot weaker.

Dean Wehrli:

Okay. Okay. Which in my mind, I know a decrease in price is still a falling market, it is. But when you start seeing numbers that look weak against the, quote/unquote, “normal” years of 2018/19, I think that’s a finding, that’s something we should point out. So you’ve kind of touched on it here a little bit, but let’s just sort of recap briefly the causes of the slowdown, the main one is home prices. And what other factors are there, things like interest rates that are causing this remodeling slowdown?

Eric Finnigan:

It’s a couple things. One is there’s a lot of product categories out there where there’s a ton of delays involved in ordering and getting it delivered and installed. Costs have risen like crazy, if you look at materials prices, they’re up 20 to 30, 40% over the last couple of years. So people are just kind of saying, “This is sort of the perfect storm at this point, prices haven’t fallen yet, there’s still a long wait to get in the door or to get in line to get a project even started. And I’m not feeling super wealthy right now. I don’t know what my home value’s going to be worth in a year from now. So I don’t really feel the urgency anymore, so I’m willing to just hold on and wait.”

The other thing is, interest rates is a big one. There’s a few different ways that interest rates hit the remodeling sector, even though I think it’s probably the least interest rate sensitive sector of housing, it still does affect it. So immediately it impacts remodeling through project financing. So we had a remodeler respond to our survey last quarter, that they were moving forward on $160,000 kitchen remodel project. And at the last minute when the customer had to fork over their deposit and the really get the project started, they no longer qualified because the financing rate that they were going to borrow at, the homeowner no longer qualified for that loan, so that project was just canceled or maybe deferred.

Dean Wehrli:

160K, were they trying to get a Michelin Star, 160,000, good Lord. Okay, so they got-

Eric Finnigan:

Yeah, that might be anomalous, it might be sort of away from the median of what people spend on kitchens.

Dean Wehrli:

Yeah. Folks are backing off due in part to cost and interest rates can certainly impact that kind of an outlay.

Eric Finnigan:

Right. And it’s such an immediate impact. The more sort of longer term impacts or the impacts that happen over a longer period, is that interest rates impact asset prices. I’m going to speak like an economist for five seconds. Interest rates and asset prices are inversely related. When interest rates go up, asset prices go down. That’s just math. So what we’ve seen is as interest rates have gone up, stock prices have fallen, home values are starting to fall, 401K portfolios are down. So that again speaks to a wealth effect, where people are feeling less wealthy so they’re less ready or less willing to make a huge new investment. The third way this is all happening is through more of the economy. The Fed’s raising interest rates to slow down the economy, and if they are successful with that, if people do start losing jobs, if we do go into recession, that’s the other way. So remodeling slows down in a recession, there’s no getting around that.

Dean Wehrli:

Okay. But we’re still in this inflationary price environment for products, for building products. What’s causing that, is it supply chain, why are we still having seen price increases in that sector?

Eric Finnigan:

I’d say there’s certain categories of pricing and materials that prices have come down, started to come down. Those are more the materials that are sort of raw commodity type materials, like lumber is way down, for instance, we saw the price of oil come down a little bit this year or in the summer. But overall prices, especially on products that require a lot of manufacturing, don’t move around as quickly, and if they do rise, the prices stay sticky for a while. I was talking with our building products dealer expert a couple days ago, and I don’t want to steal his thunder, but what he described about what the building product manufacturers and the dealers, how they think about pricing is very interesting. There’s almost like this standoff mentality that nobody wants to be the first one to lower prices. They’re all kind of waiting, they’re hoping that no one really breaks that surface tension.

Dean Wehrli:

Could it be a situation where when someone does break it breaks pretty hard?

Eric Finnigan:

It could, yeah. That’s the thing I worry about the most is that, and it’s so hard to forecast that. So it doesn’t necessarily move up and down directly in line with supply and demand, it’s more psychology and very industry specific. So if prices are staying high, if they do break, they will, I think they’ll fall quickly and more than we might expect.

Dean Wehrli:

Okay. I have a question I should have asked earlier, but it’s when you say in your index or the publication about the remodeling sector that we produce, it says that there’s a 4.9 month backlog in remodeling projects. Now here’s my stupid, probably a dumb question, that literally means your typical homeowner waits about five months to get started, the remodeling job to get started because it’s so backed up?

Eric Finnigan:

Yeah. From that question, we ask remodelers for new projects that come in today, when do you expect to start that project? How far out are you booked? And last quarter, it was a little over five months, now it’s 4.9, so it’s starting to come in just a little bit. But the number of remodelers that responded to our survey that have a one to three month backlog, has jumped.

Dean Wehrli:

Oh really? And so as that number goes down, that is another indicator of a softening remodeling market.

Eric Finnigan:

Exactly. Sort of like projects coming in versus projects getting finished.

Dean Wehrli:

And the answer is, today, I can start today, then we know we’re in a world of hurt.

Eric Finnigan:

Right. And when you start to get cold calls from contractors, you start to get mailers that say, “Hey, we’ll do your project for 35% less,” that’s when you know they’re starting to get a little desperate.

Dean Wehrli:

I was in the area doing a roof. Oh yeah. Okay. We know what you’re saying.

Eric Finnigan:

I should say too also that a lot of the focus that I have and what we’ve been talking about is on the projects that are sort of nice to have, that consumers or homeowners choose, “Hey, I want to do a kitchen upgrade. Let’s do it now.” There’s a whole other sector of the remodeling that they can’t wait and it’s on a completely different schedule. So every 15 to 30 years you have to replace your roof, every 10 years you have to replace your hot water heater, every 20 years, your furnace. Those more scheduled maintenance type projects, again, you can’t wait to replace your hot water heater until the economy’s better, right?

Dean Wehrli:

Yeah, that’s true.

Eric Finnigan:

Or you can’t wait to fix a leaking roof until the Fed reduces interest rates. You have to do those.

Dean Wehrli:

It’s called buckets, Eric, it’s called saucepans. Let’s talk about what might be happening in the future a bit more. Do we have maybe some countervailing forces here specific to remodeling, such as remodeling could be seen as an alternative right now to buy a home, homes are very high priced, interest rates are very high, can we see a little boost in remodeling from that kind of a dynamic?

Eric Finnigan:

I think so. If you ask anyone who’s looked to buy a home in the last year, and even now when the market has slowed way down, it is really hard to find a home that sort of checks all the boxes. So even again with sales way down, with mortgage rates up, the number of homes actually available to buy is fairly low by historical standards, even though we’re in such a slow housing market. So people are sort getting that instead of trading up, staying in a starter home for five or 10 or 15 years and then moving up to a nicer part of town or a bigger home, they’re saying it might actually make more sense to customize this home, to plan on staying it in it for another 15 or 20 years. And we’ve built up a ton of equity and we have a ton of money in the bank now because we’re not just scraping by, that we’re going to actually turn this into the home that we want it to be and we’re not going to go look to buy that home, we’re actually going to turn this one into that.

So there’s a few different things that I think are contributing to that. The question is will for sale inventory stay low after this current slowdown? And you can see that roughly seven out of eight mortgage borrowers at this point, have a mortgage rate below 5%, three quarters of them below 4%. So it’s going to take a lot for those homeowners to give up that mortgage, they’re sort of locked in.

Dean Wehrli:

Yeah.

Eric Finnigan:

That’s the lock in effect. Yeah.

Dean Wehrli:

The lock in effect then should be a natural benefit to the remodeling world.

Eric Finnigan:

Yes. Yes. That’s one of the, I’d say, pins on the map, things that I’m looking for that I think will keep remodeling after the current downturn is going to result in kind of a snapback effect. It’s actually going to come back pretty strong, is that we call it the trade up in place.

Dean Wehrli:

Does remodeling also react to trends? Is there almost like a fashion aspect to remodeling? It’s like, oh my god, I’ve got to have the new colors that are hot in kitchens, or does that just get overpowered by financial considerations?

Eric Finnigan:

It’s hard to find the data on that, but there’s a few different things that are … I think the answer is yes, that there’s some more trends. So if you think about this like 20, 30 years ago, to find out what’s trendy in homes, I mean, you had to open up a magazine or you had to go to someone’s house or you do open house, you had to find the home improvement show on TV. Now I think it’s just all over social media, where you can literally create your whole, curate your whole feed to what’s happening in housing and decorating and design. So those trends, and I think sort of building on work that New Home Trends Institute has really spearheaded, that trends come in faster and they’re become obsolete faster as well. So the people that are always riding those trends, it’s going to result in a replacement cycle or an upgrade cycle that’s much faster than it was before. So I think there is some point to that.

Dean Wehrli:

Which makes sense. But you would think though that, oh yeah, I would like to have that new color, but we just lost X amount of home equity, so we’re going to hold off, I would think that would be the stronger variable.

Eric Finnigan:

Yeah, it’s more economic factors rather than kind of design or aesthetic.

Dean Wehrli:

Yeah. Okay. So you study demographics, you look at that in terms of how that affects remodeling and housing more generally. Is there a demographic impact on remodeling, especially in terms of people moving, how about we start there, are people moving less and that impacts remodeling in a positive way or vice versa or what?

Eric Finnigan:

Yeah, so one thing, to a stylized factor, again, so I’m slipping to economists speak, so just erase that. People move less as they get older, 35 year olds move much more often than 65 year olds. So if you can see that the population is moving from generally aging or the median age of the population is rising, you can also assume that the amount of people moving every year is falling, and that’s been true for a couple of decades now. If you look at the number of people moving every year, it’s steadily declining.

If you sort of project out population by age, that effect is going to continue. So I think the number of people moving every year is going to, just because of the aging effect, it’s going to keep falling. The other piece of it again is the rate lock in effect, where if I’m my late 30s and I just refinance to a 2.9% mortgage, I’m holding onto that thing for as long as I possibly can. So I definitely think that there’s some credence to that, that people are just going to be moving much less over the next 10 years than-

Dean Wehrli:

This might seem redundant, but is there a potential for a generational shift that is beyond just younger people moving more, the younger generations wanting to move more, are being more home centered and remodeling, is there any kind of a generational demographic shift going on that affects remodeling?

Eric Finnigan:

Yeah, I think there’s probably a couple things I can point out here. On the younger side, they’re much likely to hire a professional to do a project rather than try and save a few bucks to and do it themselves. I’m not sure if that will continue or if that’s just a feature of younger folks.

Dean Wehrli:

Yeah, you think with YouTube and DIY making some of these things a little bit easier than they would’ve 20 years ago, there’d be less of that almost.

Eric Finnigan:

Yes. And on the other hand, there’s a app out there called Thumbtack, which is getting a home service professional, like home calls from service professionals, almost like Uber. So you can find someone that wants to paint your office and you can page or can prompt three different painters to come give you an estimate in the span of two days, where before you’d have to go through the phone book. It’s just like a lower friction to hiring a professional.,I think that’s probably the way to say it.

Dean Wehrli:

Okay. That’s interesting. That does make sense. That fits in with that generational differences. It’s just much easier to happen now, and convenient is so huge and it’s far more convenient, especially if you have some cash to pay for that pro.

Eric Finnigan:

Exactly. Exactly. On the other end of the spectrum, the aging baby boomers aging in place, I think there’s a conception out there that older people are going to be, when they hit 65, they’re going to move into retirement communities and it just doesn’t show up in the data that people do that. Very few 70 year olds move once. Most of them want to stay in their home as long as they possibly can, and that means upgrading and updating and customizing that home for someone that’s much older. So accessibility type improvements or moving bedrooms downstairs from upstairs or whatever it ends up being.

Dean Wehrli:

Yeah. That’s been true for a very long time. They age qualified 55 plus communities, your main competition isn’t another 55 plus community, it’s people staying and rehabbing their home to age in place.

Eric Finnigan:

Exactly. And those baby boomers are sitting on roughly 72 trillion in wealth right now, so they have the wherewithal to spend on their homes.

Dean Wehrli:

But they also have the wherewithal to buy a new home, some of our friends selling 55 plus communities.

Eric Finnigan:

That’s right, that’s right.

Dean Wehrli:

Shout out. What are remodelers going to do if things are slower for, let’s say the next couple years, things are slower, what’s going to happen to these, is it just a simple situation where you’re just going to have to slow a business and you’re going to have to acclimate, you might let go staff, et cetera, or is there something they could transition to?

Eric Finnigan:

I think there’s a couple of natural transitions that some of the remodelers that have been more focused on, those nice to have kitchen remodels for instance. So a couple things, one is they can focus on more of the mandatory can’t wait kind of projects, plumbing or electrical or the replacement kind of projects that are needed no matter what the economy is doing. And there’s a ton of demand for those services out there that’s not getting met very well. So I think that’s one. The other one is transitioning to smaller projects where customers that have wanted a project done for, that might be a $5,000 project, they couldn’t get a callback from a remodeler for the last few years because they’re so busy and they’re so focused on those massive projects that are the most profitable. So I think there’s probably a lot of unmet demand, pent up demand for those sort of mini projects that the professionals can handle. Those are probably the two biggest transitions I would say that you’ll see many of them taking.

Dean Wehrli:

So remodelers are going to face a lot of attitude though, “Oh, now you call, oh I see, now you need me.” Okay.

Eric Finnigan:

Exactly.

Dean Wehrli:

That tone of voice too. What factor or measure, data point, what have you, makes you most optimistic that this is going to turn around in the not too distant future for remodeling?

Eric Finnigan:

So one thing I love to look at is demographics because it’s almost like looking in a crystal ball, looking in the future. You can basically make pretty good assumptions if you know what’s happening in the demographics. You can apply a demographics kind of analysis to remodeling and the age of the housing stock. So where you can guess, make a pretty good assumption that as someone ages between 25 and 45, you can guess that they’re going to buy their first home at some point in that age range, probably between 30 and 40 and probably in their mid 30s. So 35 year olds is a really good proxy for first time home buyers.

You can make that same analysis, that same comparison for the age of the home and what projects are needed for those age groups. So we find actually that when a home is between 20 and 39 years old, was completed 20 to 39 years ago, most of the areas of the home either need replacement, or just because of obsolescence or design trends, need to be updated or upgraded. So kitchen designs, for instance, that were done 30, 40 years ago, those look really, really dated at this point. So if you’re wanting to sell your house, you just moved into a house or something like that and your kitchen hasn’t been remodeled in 30 years, it looks old and feels old.

Dean Wehrli:

Are you saying pea soup green appliances is not okay anymore? I find that offensive.

Eric Finnigan:

No, no, please.

Dean Wehrli:

I was a little worried there.

Eric Finnigan:

But also HVAC systems, roofing, basically everything needs to be redone in that 20 to 40 year old, 20 to 39 year old group. And we can also look at how many homes are actually in that group this year and next year, the year after that, the year after that. And what we find is that the number of homes in those, what we call the primary modeling years, between 20 and 39 years old is going to be at the highest level ever in 2027, roughly 24 million homes are going to be in these primary modeling years, five years, years from now.

Dean Wehrli:

That’s interesting. So it’s not just the metro areas with the oldest housing stock don’t necessarily have the most, let’s say, per capita remodeling, it’s areas with housing stock in those prime remodeling years.

Eric Finnigan:

Right, right.

Dean Wehrli:

Interesting. Okay. Let’s end with some little forward looking couple of questions here. What are some lasting changes in remodeling that you see happening specifically because of the COVID pandemic?

Eric Finnigan:

So even as the economy has reopened, people are actually spending more time at home than they did before, mostly because work from home. So the work from home seems to be stabilizing, if people do have a hybrid sort of work situation, seems to be stabilizing, two to three days a week, you’re home, two to three days a week you’re in the office. So that just tells me that roughly, we did the numbers on it, roughly 23 million people are spending between 20 and 40 extra hours a week in their home each week. And if they haven’t upgraded it or updated it at this point, they will at some point in the future. So again, more time spent in the home equals more dollars spent on the home. I think that’s a really, really big one.

There’s a few things that happened during the pandemic that are sort of an open question if they stick around. One is just the crazy pricing that people pushed through. I don’t know if cost of remodeling is going to come down at all, but it’s gone way up. It’s going to take a lot to bring it down actually. And then just the lack of homes available for sale, and that’s due to the rate lock in effect, which is really ultimately because of the pandemic and the emergency measures the Fed did to reduce mortgage rates. So when mortgage rates dipped below 4%, they got all the way down to the mid twos, just a crazy refinance boom that most people, again, 87% of mortgage borrowers right now have a rate below 5%. That wouldn’t have happened without the pandemic.

Dean Wehrli:

Okay. How about, is there anything about the remodeling sector that it annoys you because people miss it, people misunderstand it?

Eric Finnigan:

One of the questions that we get from clients a lot and what I remember from all the way back in the late 2000s and the teens, is that there was an assumption that what’s happening in the remodeling space is driven by the existing home sales numbers. So if you knew that home sales or if you expected home sales to rise 10% next year, then remodeling would go up 10%. And we’ve done some work on that and it turns out that that relationship is very weak. So if you’re trying to predict remodeling, the place to look is not existing home sales.

So there’s a few things that go into, when a home’s getting ready for sale, the owner will do some staging and really some cosmetic painting or something. And maybe when the home is bought, the new owner does some deferred maintenance, replaces a couple of things, but ultimately the sale of a home is not what drives remodeling. Again, if you look at just the number of projects, home improvement projects that happen every year, 65 to 70 million versus five to six million homes that are sold, it’s just the numbers don’t make sense. So I think if you’re wanting to look forward and predict what’s going to happen in remodeling, the place not to look is existing home sales.

Dean Wehrli:

That’s interesting because that is an intuitive argument. I don’t blame people for thinking that. Is there a lag then? You buy this new home, resale or new, does it matter, preferably resale, I guess, you buy this existing home, is it like, okay, you need to spend two, three, four years there before you get sick of that and want to change it up, is that a better predictor?

Eric Finnigan:

I think so, yeah. And there’s some data on there about how much a new homeowner will spend on the home once they move in and there is some spending that goes into it, but it’s just not enough to move the needle in a really big direction one way or the other.

Dean Wehrli:

I asked you a few minutes ago about what metrics you focus on. What’s the biggest unknown regarding the remodeling outlook? What do you wish you had the ability to measure?

Eric Finnigan:

If I had a crystal ball, I would want a crystal ball, and I think there’s a tension in remodeling and trying to forecast remodeling right now, on one side of that spectrum or one side of that is that home equity per homeowner is at the highest level ever, $342,000 per homeowner as of the middle of this year. That, to me, is a strong signal that there’s money available for remodeling and people are feeling wealthy. On the other end, interest rates are really high, so accessing that equity is much harder now than it was a year ago.

So the crystal ball I would want is what kind of wins out here? We know home prices are kind of softening and declining. Will this huge buffer, huge sort of cushion of home equity, will that support remodeling over the next two years, or is it interest rates, are interest rates the driving variable? My hunch is it’s interest rates and that home equity per homeowner is less a driving factor. But again, I don’t have a crystal ball, we’ve never been in this situation before. Mortgage rates have more than doubled in the span of eight months and that home equity is at the highest level ever.

Dean Wehrli:

It’s funny that these last three years or so, we’ve said a lot that we’ve never been in this situation before and we’ll be saying that for a little while longer, I think.

Eric Finnigan:

I think so too.

Dean Wehrli:

Eric, thank you for this tour de force of remodeling expertise in about 50 minutes or so, I really appreciate it.

Eric Finnigan:

Thanks, Dean. This has been really fun.

Dean Wehrli:

Me too. Thank you for listening to the New Home Insights Podcast. I’m Dean Wehrli, and we will see you again in a couple of weeks.


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