Home Remodeling a Forward Indicator of Housing Bottom?

Builders who specialize in home remodeling are seeing a better market than they have in years according to the National Association of Home Builders' (NAHB) Remodeling Market Index (RMI) released on Friday.  The index rose to 46.5 in the first quarter of the year from 41.5 in the fourth quarter of 2010. 

The current RMI is the highest the index has been since the fourth quarter of 2006.

The RMI is based on builders' perceptions of current remodeling activity and on indicators of future activity such as calls for bids.  In addition to the RMI there is an index reflecting each of its two components.  Any score of less than 50 indicates more respondents view the market activity as lower (compared to the prior quarter) than report that it is higher.

Current market conditions increased from 43.3 in the fourth quarter to 46.1 while future market indicators jumped to 46.8 from 39.7.  

"Remodelers report a jump in activity so far this year and have been receiving more calls for work and appointments," said NAHB Remodelers Chairman Bob Peterson. "However, many home owners are still slow to commit to remodeling due to feeling uncertain about the economic recovery and difficulty obtaining loans."

There were indications of market growth in three of the four regions.  The RMI rose from 38.8 to 46.1 in the Northeast and from 39.7 to 46.1 in the West.  The South had a marginal rise from 45.8 to 46.1 and the Midwest, while still scoring higher than the other regions dropped substantially from 54.3 in Q4 to 47.1.

All current indicators of types of remodeling increased: major additions to 50.3 from 48.6, minor additions to 48.0 from 43.9, and maintenance and repair to 39.5 from 37.0. Future market indicators also improved across the board: calls for bids rose to from 47.2 to 53.1, appointments for proposals to 52.4 from 43.1, backlog of remodeling jobs to 49.7 from 42.6, and amount of work committed for the next three months to 32.1 from 25.9.

NAHB asked an additional special question of remodelers in this survey cycle: why did they think prospective customers are holding back from remodeling their homes?  Ninety-percent of the builders cited the difficulty of obtaining financing while 81 percent noted that customers had lost equity in their homes and 74 percent mentioned economic uncertainty.  Other reasons given by builders include their reluctance to invest in a home that might not hold its value (67 percent), negative information from the media (62 percent) and inaccurate appraisals which leading to difficulty in getting financing (54 percent.)

"Home remodeling continues to slowly increase and continued growth through the year is expected." said NAHB Chief Economist David Crowe. "The fact that some indicators are breaking 50 means remodelers are seeing improving activity in their markets. While credit scarcity and economic uncertainty continue to weigh down remodeling, signs of increasing consumer interest are promising."

"With so many foreclosed properties sitting empty on the market we can expect remodeling and rehabbing to be a leading indicator of a bottom in the housing market", says MND's Managing Editor Adam Quinones. "We already know there is dearth of affordable rental housing available to low income renters. From that perspective, FHA should open its 203(k) program to investors if they want to accomplish their affordable housing goals."