Just a few short years ago, forecasts of future kitchen and bath activity were very hard to come by. The government offers a very authoritative retrospective, the American Housing Survey, which comes out every other year. Meanwhile, the U.S. Census has, in recent years, cut some of its remodeling surveys.
Today, Harvard University’s Remodeling Futures Program has done great work with its Leading Indicator of Remodeling Activity, the LIRA. And a private remodeling forecast has emerged from Newport Beach, CA-based John Burns Real Estate Consulting. Its industry forecast efforts, led by Todd Tomalak, have proved to be accurate.
Then, one year ago, the firm partnered with the National Kitchen & Bath Association to launch the Kitchen & Bath Market Index, or the KBMI. In it, the Burns team analyzes quarterly surveys from a wide swath of the industry, but primarily from those closest to the action: dealers, designers and retailers.
The recently introduced KBMI gauges professional industry sentiment among four groups within the industry. All groups (designers, retailers, construction pros and manufacturers) are signaling growth, with readings in the middle 60s.
Source: John Burns Real Estate Consulting, NKBA, 2019.
The most recent KBMI for the third quarter of 2019 registered a reading of 65.4. Any reading over 50 indicates a degree of expansion. That number is down from Q1 of 2019 when it hit a very bullish 71. These are composite indices that blend current conditions (61.7), future conditions (68.4) and health of the industry (6.7). The last figure is on a scale of one to 10, where readings over five are considered positive.
Beyond the KBMI, Tomalak is liking what he is seeing in the broader housing and remodeling markets. In December, he revised upward his firm’s view of kitchen and bath activity for 2020.
“You know, timing is always hard to predict, but based on near-term indicators – boots on the ground that we’re looking at right now – we think we’re probably situated for a very strong first half of 2020 [for kitchen and bath activity],” says Tomalak, explaining that rising new-home sales activity, up 26 percent in recent months, is an important new factor. This comes on top of increasing average home prices and a big drop in mortgage-interest rates – 120 basis points (-1.2%) from the beginning of the year.
Derived from proprietary forecasts of American Housing Survey data and other data, John Burns Real Estate Consulting is forecasting slight gains in remodeling activity in 2020. The year is projected to get off to a fast start. (Note: Includes labor and materials)
Source: John Burns Real Estate Consulting, LLC; U.S. Census, CTBUH (Pub: Nov-19)
“There’s a lag time from the time when we [first] see an uptick in new residential construction numbers to when it usually hits building-materials orders. But everything we see says we’re going to see a pretty strong Q1 and Q2. We’re a little bit more cautious on the back half of the year. As a result, we just raised our remodeling and repair forecast – for both large projects and small. We still expect to slow down at some point. We still have a bit of a pivot as we go from big projects to smaller projects (a mix-shift), but both numbers are sequentially larger than they were before.”
Houzz’s Pro and Consumer Outlook
With 40 million professional and consumer users on its popular platform of design ideas for homes, Houzz.com is four years into the launch of its design and construction activity forecasts. Houzz Chief Economist Nino Sitchinava oversaw the creation of its Houzz Renovation Barometers. At this time, kitchens and baths are not tracked separately by Houzz, but their data indicates that kitchens and baths are the most popular renovation projects overall.
The company’s Q4 2019 numbers were quite positive. Future expectations for renovation activity stands at 67 for architects and designers, and at a whopping 74 among construction professionals. Like the KBMI, Houzz indices are pegged to an over-and-under baseline of 50. All readings above 50 are seen as very positive.
Architects and designers are indicating solid business expectations for renovation activity in 2020. All readings over 50 are considered positive and expansionary.
Source: © 2019 Houzz Inc. All Rights Reserved
In addition, Sitchinava’s team asks about backlogs of work to be performed. For architects and designers, the backlog is 4.1 weeks, down slightly from 4.7 weeks. And for construction professionals, the backlog stands at 5.2 weeks, up from 4.9 weeks one quarter prior.
According to Sitchinava, current backlog numbers correlate to a strong start to the new year, unlike 2019 when a variety of unfavorable weather conditions in many parts of the country suppressed the level of renovation activity across the country.
“Because of the delays in project activity in the first half of 2019 due to weather, we witnessed a pretty significant uptick in professional confidence and project backlogs at the end of 2019,” Sitchinava explains. “The increase in ‘expectation confidence’ and backlog towards the end of 2019 is indicative of the fact that some of those delays from last year are spilling over into 2020 projects that did not begin in 2019 due to weather. In 2020, we’re actually going to see growth in spending on home improvement in the low single digits.”
Sitchinava points out that, at 2 or 3 percent growth, her forecast is higher than Harvard’s LIRA, which is predicting very low or even flat growth for remodeling activity as compared to 2019.
Remodeling and specialty contractors on Houzz are indicating solid business expectations for renovation activity in 2020. All readings over 50 are considered positive and expansionary.
Source: © 2019 Houzz Inc. All Rights Reserved
A Shift in Projects and Products
Beyond the fast start, both Tomalak and Sitchinava see similarities to some of the underlying forces shaping the year ahead. Tariffs and duties at the world-trade level have had a significant impact on overall prices for building materials. And both see this inflationary pressure as a key reason why the remodeling market and, in particular, kitchen and bath activity will grow in dollars this year. According to Sitchinava, the increase in dollars comes despite a steady reduction in the scope of projects that homeowners are undertaking via Houzz’s consumer-trends survey.
“What we have seen, year-after-year of surveying our consumers, is the size of projects in terms of scope is mildly declining from 2018 on. So, in 2018 we saw a mild decline in the scope of projects. In 2019 we continued to see a mild decline in scope of projects, and that applies to kitchens and bathrooms in particular. And so there is a very interesting dynamic happening right now in home improvement,” Sitchinava explains. “For example, installments of cabinetry, appliances, flooring, faucets and countertops has retracted. So we see the scope of projects is declining because the price of products and materials are increasing. The average price point is higher than it was last year. It’s a really interesting mix-shift that’s taking place in the market today.”
Tomalak sees the same mix-shift taking place. His company’s analysis, which is based on American Housing Survey data, also forecasts a reduction in average project size.
“We spent a lot of time trying to uncover what we believe are the causal factors that really drive people to do more remodels, or to spend more or spend less per remodel,” Tomalak explains. “And what that did was then give us a really good visibility to what drives the size of projects and then also shed further light on some of the individual product segments themselves.”
The company now scores product categories for their vibrancy on a scale of one to 10. According to this analysis, luxury cabinets are trending lower in this market. Higher prices for products have created a growing willingness on the part of some buyers to shop online.
“Luxury consumers also have the ability to shop online. And some of the dealers in our survey point to issues where clients search a certain type of high-end luxury cabinet and see a much lower price item that looks very similar online and it might even be lower than what the dealers themselves are paying. So there’s a little bit of channel conflict that’s going on that will probably shake out over the next few years due to this mix-shift,” Tomalak explains.
The mix-shift also extends to project types. Burns is scoring kitchen remodels at a 6 out of 10 for 2020, but bathrooms are almost an 8 out 10 where 10 is the strongest demand. The logic for this change relates almost entirely to longer average ownership tenures and lower price points, the company’s analysis says.
Millennials Demonstrate Different Behaviors
Baby boomers, those born between 1946 and 1964, have dominated the remodeling market for three decades. But now, as the oldest boomers turn 73 and are exiting homeownership, in many cases younger generations are picking up the slack. According to Houzz data, about 14 percent of the kitchen and bath and remodeling market is now driven by millennials, those in their late 20s to late 30s. Sitchinava says the company’s consumer data suggests that millennials tend to do more projects in more parts of the home, but the solutions are more cosmetic.
“The homes millennials tend to buy are a lot older with a lot of issues: cosmetic issues, structural issues, exterior or interior issues, outdoor and so forth. And what we’re seeing millennials do is they’ll go after many projects, kind of simultaneously, but they’ll do the minimum necessary to sort of maintain the home, which is very different from the way baby boomers renovate,” Sitchinava explains. “Ultimately, what we see is that the spend of the millennial renovating homeowner is significantly lower than that of the baby boomer. We really have not seen a major push coming from millennials, but they do represent roughly 14 percent of the renovating homeowners on Houzz.”
Other market observers see similar demographic effects. According to Harvard’s Kermit Baker, the baby boomer cohort is responsible for 50 percent of all remodeling activity in the U.S. today. They have been the luxury buyers who’ve consistently traded up and remodeled their homes the past 40 years.
Now buyers born in the 1980s and 1990s are increasingly buying homes and boosting the homeownership rate. “The homeownership rate seems to be finally reversing itself and starting to build some momentum and will continue to see that as baby boomers age,” notes Baker.
As part of their work studying demographics, Tomalak’s team has quantified the effect of younger buyers very specifically. “We are in the midst of a tailwind of younger buyers. First-time buyers born in the 1980s create an 11 percent entry-buyer tailwind versus those born in the 1970s. When it shifts to those born in the ’90s, the oldest is now 29 or 30, [and] that’s a 6 percent tailwind. So we’re coming off a period of 11 percent tailwind into a period of 6 percent tailwind,” says Tomalak.
Tomalak says today’s 35-year-old homeowners are doing a lot of remodeling, but like what Sitchinava is seeing, they are approaching it much differently than the average 50-year-old homeowner. Namely, they are doing 35 percent more projects, but they are spending 30 percent less overall.
“If you swap in a 35-year-old for a 50-year-old home owner, that new buyer will do over 45 percent more discretionary interior remodels – kitchen and bath and flooring, etc. In addition, they’re over 50 percent more likely to replace systems like furnaces, air conditioners and the HVAC. They’re much more focused on monthly operating costs and the efficiency of the home,” Tomalak explains.
“From 2013 to 2017, it was all about a relatively few projects, but there were really expensive projects and a lot of growth at the luxury end. We probably are going to see more growth at the lower and mid-price point, but a lot more volume.”
In summary, the coming year is expected to get off to a fast start led by pent-up kitchen and bath activity.
“We continue to see kitchens and bathrooms being the most popular projects among renovating homeowners,” says Sitchinava. “We believe that the kitchen and bath category will remain quite healthy going into 2020. The prices of building products related to kitchens and bathrooms are increasing and, as a result, we see homeowners retracting in terms of their scope, but the popularity over the projects really has not declined.”
Kitchen and bath designers should make the most of the first six months of the year, notes Tomalak. “Don’t fumble in Q1 and Q2,” he warns, “because you won’t be able to make it up in Q3 and Q4.” ▪