HOME IMPROVEMENT, REHAB INVESTMENTS SHRINK with Sluggish Housing Market!
HOME DEPOT, LOWE'S EARNINGS DROP 27.5, 30.0 PERCENT IN 4TH QUARTER, 2007!
Old-school "common sense" would suggest that a strugling housing market would improve the outlook for companies catering to the "Do It Yourself" home-improvement market. You might think that more buyers will rehab their current home in an uncertain economic climate, rather than buying a new home, and that would benefit busines for General Contractors and trades people.
Apparently, not really!
Here in Chicago, and across the country, many are tightening their belts - not necessarily their tool belts - when it comes to spending rehab, remodeling, or home improvement money.
According to Kermit Baker, who studies housing trends for Harvard University, "The best indicator [for remodeling in the near term] is sales of existing homes." Investment in home improvement and remodeling has fallen in parallel to the stuggles in the housing industry, he continued, and he expects the home improvement market to continue to be weak for the balance of 2008.
When home sales were at high annual levels, investment in rehab and home improvements also increased - roughly five percent each year, according to a researcher for the National Association of Home Builders, Gopal Ahluwalia. Remodeling expenses hit $228 Billion in 2006, trailing the peak home selling year of 2005.The NAHB said Americans' remodeling expenditures peaked at about $228 billion in 2006, just trailing the peak of the sales boom in fall 2005.
Connecticut contractor Alan Hanbury noted that most home buyers do considerable remodeling within the first nine months of their new home purchase. Fewer new home buyers, mean less home improvement investment.
The other intervening factor is tighter credit. Tougher underwriting standards on home equity loans mean there is less of a ready pool of capital to finance home improvements. Many are putting off constructing that new deck, or dream kitchen, or redone master bath - based on the limited availability of home equity funds.
Taken together, Home Depot has seen big declines in orders for custom kitchen cabinetry, and new premium appliances, among other home improvement items. Recent declines in prices for building materials, such as lumber and drywall, due to reduced demand, are directly impacting average sales ticket, and corporate earnings, at Home Depot, as well as competitor Lowe's.
Earnings fell for both home improvement retailers during the Fourth Quarter, 2007 - down one-third year over year at Lowe's, 27.5% at Home Depot.
Read more about these trends in Mary Umberger's column in last Sunday's Chicago Tribune, and also in Mary Ellen Lloyd's article in today's Wall Street Journal.
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