Total housing starts will continue their upward climb in 2011, increasing more than 20 percent over 2010, according to economists at McGraw-Hill Construction, New York, and the National Association of Home Builders, Washington, D.C. However, the housing picture is not as rosy as this statistic might indicate. Despite the growth trend, starts remain dramatically lower than pre-recession levels. This year, the number of total housing starts will still be less than half what it was in 2006, coming in at 739,000 units compared to the 1.8 million units five years ago, according to NAHB. Single-family housing starts, in particular, will still be down 40 percent, coming in at 590,000 units compared to 1.47 million units in 2006. (See Table 1)
The housing market's slow recovery can be traced to several factors, including the overall economy's failure to show consistent improvement (see Closer Look). "The single-family market remains in a holding pattern after the end of the home buyer tax credit, as buyers await solid positive economic indicators that their jobs will remain in place and that the economy is moving forward," said David Crowe, chief economist and senior vice president, NAHB, in his Nov. 17 "Eye on Housing" report.
"People got burned a bit by the uptick in housing activity prior to the tax credit expiring last spring," says John Swanson, editor and associate publisher of Glass Magazine's sister publication, Window & Door. "That died out and left things flat again. So people are skeptical [about recovery] and will move very slowly on anything new," he says.
Homebuilding recovery has been well below historical averages, agrees Kermit Baker, chief economist for the American Institute of Architects, Washington, D.C. "As the market struggles to recover, excess housing supply inventory limits need for new homes, while low rate of household formations has been limiting demands," he told attendees at the Outlook 2011 Executive Conference, Oct. 28-29, 2010, in Washington, D.C. "Mobility rates have been declining, and limited home equity and low mortgage rates are creating a 'lock-in' effect that will slow mobility for years to come," he said.
The remodeling market
After three years of decline, the remodeling market appears to be turning around, with "substantive growth in remodeling spending likely in 2011," according to the Leading Indicator of Remodeling Activity, published by Harvard University's Joint Center for Housing Studies, Cambridge, Mass.
"Even though spending is still below its 2007 peak, the LIRA indicates that homeowner improvement spending is expected to be up at a double-digit pace ... through the first half of 2011," officials said in a fourth quarter 2010 release. Spending should be up 12.8 percent, according to the JCHS, hitting $133.1 billion in the second quarter of this year. (See Fig. 1). At its peak in second quarter 2007, home improvement spending reached $146.2 billion, according to the JCHS.
The remodeling recovery began in fourth quarter 2010 and should pick up steam going into 2011, said Baker, who also serves as director of the JCHS Remodeling Futures Program. "Low financing costs and a wave of previously foreclosed homes coming back on the market and in need of renovation are expected to generate healthy growth over the next several quarters," he said in the release.
Remodeling spending suffered a significant decline during the recession, bottoming out at $112 billion in fourth quarter 2009. Upper-end discretionary projects took the biggest hit, with spending on kitchen and bath remodels decreasing from $47 billion to $38.5 billion in 2007-09, Baker told attendees at the Outlook conference. Market recovery is beginning at the lower end of the price spectrum, he said.
Geographically, the locations of top spending remodeling markets shifted during the recession. From 2000-09, top spenders were concentrated mostly on the Northeast Seaboard and West Coast. Recently, however, the Midwest and South have fared better, in addition to metro areas with lower rates of delinquent mortgages, he said.
Among the variables that could affect the housing and remodeling markets in 2011: consumers' ability to obtain financing, extension of tax credits for energy-efficient home improvements, and ongoing developments related to the Environmental Protection Agency's lead rules.
In fourth quarter 2010, both short- and long-term interest rates were very low, with mortgage rates for most homeowners at 6 percent or less, Baker said. Among bank officials whose lending standards were tighter than normal, the majority predicted their banks' lending standards would not return to normal until after 2012, or would remain tighter than normal for the foreseeable future, according to the Federal Reserve Board's fourth quarter Senior Loan Officer Opinion Survey on Bank Lending Practices.
At press time, it also was still unclear how taxes would impact the 2011 economy. After the midterm election, Congress was expected to pass an extension to the tax cuts implemented during the Bush administration. However, it was still unclear who those cuts would extend to. As of Dec. 1, negotiations were ongoing as Congress looked to finalize a plan before the tax cuts expired at year's end.
For retailers offering window replacement services, tax credits and EPA lead rules also could significantly affect business this year. In 2010, energy retrofits and renovation of distressed properties helped revive a weak home improvement market, Baker said. The number of firms reporting they had worked on projects qualifying for federal energy tax credits increased to 58 percent in third quarter 2010, from 39 percent a year earlier, according to the 2009-2010 JCHS National Green Remodeling Surveys.
It remains to be seen whether retailers will be able to enjoy the benefits of such tax credits in 2011. On Dec. 4, 2010, the U.S. Senate rejected a proposal by Sen. Max Baucus (D-Mont.) that sought to extend and modify the existing home retrofit tax credit for windows that qualify toward energy-efficient home improvements, according to a release from the American Architectural Manufacturers Association, Schaumburg, Ill. At press time, the credit was set to expire Dec. 31, 2010. AAMA, in addition to the Window & Door Dealers Alliance, McLean, Va., were urging members to contact their representatives in support of a tax credit extension.
Also impacting the window replacement business will be the EPA lead rules. Issued in April of last year, the lead paint regulations require renovations and repairs—including window replacements—in pre-1978 homes be conducted using lead-safe work procedures. These procedures include training and certifying contractors in lead-safe work practices, mandatory lead-paint based clearance tests, and certified project inspection. Surveys conducted by the Window & Door Dealers Alliance, Mclean, Va., indicate the LRRP rule has had a significantly negative impact on contractors. At the American Architectural Manufacturers Association Fall Conference last year, Rich Walker, AAMA president and CEO, reported contractors were avoiding window sales opportunities, and new window orders were tracking 20 percent below trend, particularly in the Northeast, as a result of the new regulations. Industry efforts to repeal the rules are ongoing.