Growing pains: despite the rosy outlook

Byline: Fred Miller

Many people are concerned about the near-term future of the home improvement industry. These concerns arise primarily due to higher interest rates and a slowdown in housing turnover. But unlike the new-home construction industry, home improvements are not nearly as cyclical.

To be fair, housing turnover does help to drive home improvement activity and the industry has enjoyed the benefits of long-term growth in housing turnover. From 1995 to 2005, the combined sales of new and existing homes grew by 5.2% a year. In a study conducted by the Home Improvement Research Institute (HIRI) earlier this year, two-thirds of recent homebuyers had completed one or more projects in their homes within a year of moving in.

But the home improvement industry is far more complex. A large component of sales is need-driven. Older items that require replacement can fall into this area as well repairing storm damage and changing household requirements, like adding a home office. Yet even when not moving, homeowners spend heavily on improving their homes. As consumer trends point to the home as a focal point in people’s lives, the desire to keep it in good repair and looking fresh transcends the financial aspects of increasing the home’s worth. In fact, a 2005 HIRI study found that 84% reported beautifying their house as a motivation for doing a kitchen remodel, versus 59% who merely wanted to elevate its value. Similarly, the top reason for remodeling a bathroom was to upgrade an old design/decor (at 73%), while 49% cited enhancing property values.

With a forecast of a strong economy overall, HIRI expects 2006 to be yet another record for home improvement sales. Total home improvement product sales in 2005 were estimated to have reached a new record level of $287 billion–up 9.2% over the previous year. A warm winter and continued hurricane rebuilding have provided a strong start to home improvement product sales in 2006. Growth is expected to slow in the second half of the year from the moderating impact of the lower housing turnover and comparisons against the additional sales generated by the 2005 hurricane season. For the full year, sales are expected to increase to $312 billion, an 8.8% growth.

Sales to both consumers and contractors are benefiting from these trends. The 2006 consumer market is estimated at $231 billion, a growth of 9.0% versus 2005. Sales to the professional market (contractors) are estimated to reach $80.7 billion this year, a growth of 8.1%. These estimates have been developed as part of an ongoing HIRI program by one of its suppliers, Global Insight. HIRI’s market figures are unique in that they focus solely on home improvements and product sales. Labor costs for contractor-done work are not included in these estimates.

But the most current data on the health of the home improvement industry is somewhat mixed. In recently released data from the U.S. Department of Commerce, retail sales for building material and garden equipment/supply dealers from May to July 2006 grew 10.1% over the same period in the prior year. This growth, however, was significantly above retailing in general at 5.7%. Moderate growth was reflected in the quarterly reports of manufacturers and retailers in home improvement. Second-quarter results reported by The Home Depot and Lowe’s showed sales growth of 16.7% and 12.2% respectively. Comparable store sales trends (stores open 12 months or more) were positive for Lowe’s at +3.3% and down slightly for Home Depot at -0.2%. Both companies tempered their forecasts for the second half of the year.

Recent news on housing turnover has not been favorable. According to the National Association of Realtors, existing home sales in July 2006 fell by 11.2% from July 2005, and new home sales were 21.6% lower than last year’s record levels. The home improvement industry, by comparison, has had a compound growth rate of 6.1% from 1992 to 2005, and not one down year. New housing turnover declined in two years over that same period; the most recent decline occurred in 2002, when it was off by 4.5% while the home improvement market grew 6.1%.

The long-term outlook for the market remains strong. Global Insight projects an average of 5.0% total market growth for 2007-2010–slightly below the pace of the past five years, but well ahead of the rate of overall economic growth. While growth rates will likely moderate for late this year and early next year, we are still building record year on top of record year. And for this, industry professionals can be thankful.

Fred Miller is managing director of the Home Improvement Research Institute, a nonprofit organization of manufacturers, retailers, wholesalers and allied organizations in the home improvement industry.