Recovery--Where’s the Opportunity
for Your
Business?
Part 2 of
2
To read or re-read part 1;
Why Your
Recovery May Be Just Around the Corner, But Never Quite Here
click here:
Don’t
look for a miraculous recovery in housing starts.
While
housing has historically led America out of our previous economic hard times,
today’s housing market is years away from sparking a recovery because;
1. the
market in many areas is flooded with foreclosed, vacant houses idly awaiting
new owners.
2. new home
financing is difficult in many cases.
3. having
lost their homes through foreclosure, many homeowners are years away from
having credit repaired to a point of buying a home—they are sentenced to renting
in the near term.
4. retirees
who would love to sell their homes and move to a more attractive location
(think; family, weather, lower cost of living) either can’t find buyers or
can’t afford to sell at today’s value.
Remodeling
volume continues to drag, as;
1.
a house is no longer looked at as an attractive investment vehicle
by many.
2.
many more homes are worth less than is owed on them—a condition
that does not inspire the owner to improve or in some instances even maintain
them well.
3.
home improvement lending is non-existent in many areas.
4. Lead Paint issues make renovations less attractive in homes built before 1978.
What are
we hearing? Read on to see what those in the trenches are saying;
1. “Business
has not recovered as fast as I expected.
2. “I though
this year I would be able to see more interest in remodeling.
3. “By now
we expected to see evidence of the housing market recovering and be able to say
that a recovery had begun. That hasn’t really happened.
4. “We’re
going to have mortgage distress for some time to come.
In
summary;
1. there is dramatically decreased demand for your products and
services among a much smaller pool of potential clients.
2.
there is no economic recovery in sight for most areas of the
country.
3. small jobs are the norm; fewer luxuries and more simple projectsdriven by needs rather than wants.
Best ways
to position your company for the near future;
1. the handyman business continues to be a powerful tool to build
relationships that lead to bigger jobs.
2. serve those geriatric Boomers by making their homes more
accommodating with; private quarters for live-in care-givers, dual master
bedrooms, barrier free shower stalls, tub cuts, wheelchair accessibility,
elevators and lifts, and all the details that make the home accessible to those
with limited mobility.
3. demand for renovations driven by energy conservation has been
driven by many programs supported by utility companies and government programs
at all levels. While funding resources perhaps are dwindling, astute remodelers
are using Building Science as a way to sell more products and services
to their existing client base.
4. become familiar with tax credits and other energy conservation
incentives from federal, state, city, utility company for your location at www.dsire.org . These programs can often make
remodeling more affordable.
Those who
survive will either be;
1. the
cheapest in price, or
2. the best
at generating lots of leads and converting these leads into sales, or
3. the best
at using tax credits, incentives, Green or Building Science principles in
general to add value (more comfort, lower costs to maintain and operate)
to most any remodeling project.
Those who
can’t do any of the above will work for those who can.
Of the
above three choices for survival—those who know me are quick to conclude that I
will cross out #1 as an option for long-term survival unless you can also cut your operating costs. Surviving by option #2
means that contractors need to be versed in what I have come to call the “the P
Process” --see more details here; http://youtu.be/NINHhbEvIEA . Option
#3 might mean gathering some expertise in Building Science (otherwise known as
Home Performance) and/or alternative energy and Green Building.
What
else?
Is there
an option for the more adventurous? Buy houses at rock bottom prices and hold
as rentals with positive cash flow. Better yet, sell the properties and carry
the mortgage by structuring the sale to allow you to recover your costs and
create an income stream. (If this interests you, contact me for more details.)
After
everything is said and done, is there a possible game changer lurking
in this economic muddle where we find ourselves? Yes there is—inflation. If
inflationary times return we could see homes again become sought after as they
have been in recent decades. When the banks begin to lend money as home values
climb and the population feels financially secure enough to begin spending once
again my sources say inflation will make home ownership attractive. Inflation
won’t be seen until money starts to flow again.
The US is
one of the few countries where you can buy a home and pay over a long period of
time with a fixed interest rate that is deductible from personal income taxes.
A home that increases in value every year (at least in perception) combined
with a sizeable tax break for ownership is hard for most Americans to resist.
Fellow Industry Professionals,
Henry Ford was quoted as saying: 'Business is never as healthy as when, like a chicken, it must do a certain amount of scratching around for what it gets.' I agree! Today some of us are scratching and turning up sufficient crumbs of business to keep us healthy, although our kids are much skinnier than they were during the roaring 90's. However too many of us have passed the point of 'scratching around' and in fact find ourselves digging a hole from which our only hope of escape would be a miraculous economic turn around. Here's my question; "What if this is as good as it gets?"
Are you ready for more of the same? In order for us to understand what might drive tomorrow's market, we need to look over our shoulders to see what drove the market in recent decades.
1. A good portion of the recent boom in the renovation market was driven by wants rather than needs. In order to help us finance our hunger for bigger, newer, faster and sooner, we were offered Home Improvement loans based on a calculation of the value of our homes after subtracting the mortgage. For many, it was a no brainer--"Honey you can have your new (kitchen, studio, workshop, pool) and we'll still have enough for that european vacation we've dreamed of."
2. Our homes were our sanctuary, personally and financially. Often the home was (and is still) the biggest and sometimes the only asset of any value. Yesterday this made sense based on the historic increase in value year after year, decade after decade. What better place is there to spend money than where you can enjoy your investment daily and still earn a good return. It was even better--many times not only the return (appreciation) was tax free, but the interest charges for the loan were deductable.
3. Mortgages were readily available and homes were liquid. If a home stayed on the market for 60 days something was wrong. We bought a house today with the plan to remodel or expand it and then sell it and move up. Often this allowed us incredible upward mobility--we could move into neighborhoods we could only dream of previously.
4. Builders were putting up new homes faster then ever. Homeowners were selling more homes than ever (see #3 above). Each of these transactions was an instant opportunity for remodeling and renovation contractors. Basement and bonus rooms needed completion and decks added on the new homes. Additions and upgrades were required on the resales.
5. An insatiable demand for homes contiued to drive up prices. Higher prices fed more sales, more borrowning, and more offers to sell. The cycle spins faster.
Now, turn around and face the future. The underlying principles we relied on yesterday to support the purchase or improvement of a home have been turned inside out and upside down. Our maps are outdated;
1. Too many homeowner's (30.6%) are held captive by homes worth less than the mortgage balance. While this condition might be bearable if there is no simultaneous change in income, large numbers of homeowners found themselves out of work. Thus we have forced sales of homes at lower prices--and if this isn't successful the foreclosure process begins, and will result in 2.5 million distressed sales in 2011 and again in 2012.
2. Yesterday's homeowners are today's renters, and sure those renters would like an updated kitchen but the absentee owner can't see the payback in that. As a matter of fact, the owners are barely interested in refreshing the paint when it peels.
3. We have a credit depression. Those who could take advantage of depressed prices find themselves tied up in stricter lending requirements or outright confusion on the part the lenders that keep the deals from closing. If finding money to purchase the home is difficult, finding money to improve might even be more so. While remodelers have cut wages and benefits or negotiated subcontractors prices down, the buyer has no ability to buy even at today bargain prices. Those that can buy can and often do drive a hard bargain with hungry contractors.
4. Now home improvements are driven by needs rather than wants and justified by comparison. When real estate values go up quickly the sin of paying more for the peace of mind of hiring the right contractor is overlooked--but that's not likely to happen in this market. When the outlook for real estate appreciation is dim, we only improve, repair or replace when we have to. Homeowners have learned that homes can't go up in value forever and are not limitless piggy banks. Consumers are skeptical.
5. The builder is once again the remodeler’s competitor. So is the handyman. Many young people will delay or abandon attending college for financial reasons, perhaps becoming the newest pool of low-cost competition or otherwise increasing the labor pool.
6. Government intervention will slow the recovery; the RRP rule will surely retard consumer demand. Health concerns seem are perhaps justified, but the timing is rotten.
The housing market is the engine that pulls us out of declines but today the vehicle is up on blocks and someone has stolen the battery. Building permit numbers are still melting down from the high late in 2007. A turn around here would be a leading indicator of a recovery. Unemployment is still growning. A turn around here would be a lagging indicator confirming we are indeed improving economically. The home improvement side of building permit activity has actually returned to positive territory for the first time since 2Q 2007, climbing 1.8% anually.
Today, people are staying put, prisoners in their homes. I believe that in the near future the perceived obsolescence in housing will not be driven by whims of changing kitchen and bath fashion, but by; health, comfort and safety issues, followed by energy costs (in that order.)
American ingenuity will overcome, but time is needed. If you are still in command of a healthy business you are a surviver. Before you mourn the death of an expected future, imagine a new future. A good portion of today's carpenters will be replaced by technicians and diagnosticians, just like we see in auto repair shops--years ago I actually used to change the 'points and plugs' on my own car on my own driveway. Now cars are more complicated and a computer diagnosis dictates when and what maintainence repairs I need. Homes are heading in that direction as well.
What are you to do?
1. Every construction project will include a diagnostic angle. Offer more professional, personalized rather than cheaper service--look into BPI(bpi.org) or RESNET (resnet.us) training.
2. Develop a nose for numbers, buy estimating (clearestimates.com) and job cost accounting software (QBpro by Intuit) and make it your best friend. Savvy contractors will complete this QB relationship with some counseling from the likes of onlineaccounting.com.
3. Play on your strengths. You know how to survive in the remodeling business-- you've proven than. Others who are coming into the Building Science area come from the subcontractor arena. You've got a head start on dealing directly with the homeowner that they are sorely lacking.
4. Look for other indicators of niche markets; 16.3 of U.S GDP (read;every dollar spent in the country) expected to be spent on elderly care. Get trained in "Age in Place" remodeling.
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