As 2015 wrapped up on a strong note, the kitchen and bath design industry can look forward to more good news in 2016. That’s according to experts in the kitchen and bath industry, home building and remodeling and real estate markets who recently shared their insights with KBDN.
“We are cautiously optimistic,” says Bill Darcy, CEO of the Hackettstown, NJ-based NKBA. “We are projecting 2016 to be much the same as 2015 for kitchen and bath projects…that is to say growth will continue, slowly, based on housing starts increasing about 7% to just under 1.2 million new homes.”
Much of the enthusiasm is based on the expectation of a 2% growth in GDP and about 2.5 million new jobs for 2016, notes Darcy. “With growth, comes jobs,” he says. “Over the last few years, there has been such inconsistency and it’s been a long time for our members to feel any sort of stability, but now some consistency is being established.”
Danielle Hale, managing director of housing statistics for the Chicago-based National Association of Realtors, adds that while 2015 showed a bit of a slowdown compared to 2014 – about 2.4 million new jobs versus about 3 million – job growth in 2016 looks to continue at a good pace. That translates to an increase in existing-home sales, she notes, which were forecasted to finish 2015 at a pace of 5.3 million. “We expect 2016 to be around 5.4 to 5.5 million,” she says. “We also saw that coupled with a pretty healthy increase in the median price of homes.
“There is a bit of a delay between job growth and its translation into existing-home sales,” she adds. “People generally need to be in a position for a little while to feel comfortable with job security and stability and to feel comfortable with the income they are receiving. Banks like to see a good bit of income history as well, so we usually see a bit of delay. But now that we’ve had several years of job growth over 2 million, that is leading to the increased sales we see now. We are expecting good things out of the 2016 housing market.”
That’s good news for the kitchen and bath industry, Hale continues. “Data shows that when people are moving, immediately after a home purchase is a good time to tackle home renovation projects,” she notes. “We find people are spending additional money then. The fact that home sales are forecast to increase in 2016 is good for the home design market.”
Stars of the recovery continue to be remodeling and multi-family housing, both of which are expected to continue to grow this year, albeit at a bit slower pace due in large part to their relative success in recent years.
David Pekel, national secretary of the Des Plaines, IL-based NARI, and president/CEO of Pekel Construction & Remodeling in Milwaukee, WI, references Harvard University’s Joint Center for Housing Studies report that shows remodeling in 2015 actually slightly exceeded 2007, the industry’s peak. “In 2007, remodeling expenditures were about $324 billion,” he says. “We’re at about $326 billion for 2015. We have seen an uptick in home improvement expenditures and there is a projection of another modest increase into 2016 as well 2017. Indicators point in the direction that the recovery is complete.”
Kermit Baker, senior research fellow, Harvard University’s Joint Center for Housing Studies, also sees remodeling spending continuing to grow, most likely in the mid-single-digit range for the next few years. “That is healthy, sustainable growth, given that it has regained its previous high,” he says.
Like the remodeling sector, multi-family housing is a bright spot, although Bob Denk, senior economist at the Washington, DC-based NAHB, expects it to slow in 2016, in large part because its recovery is back on track. “It’s between 300,000 and 400,000 units per year,” he says. “That’s pretty much where we spent the 10 years before the crisis and that seems to be a sustainable pace.”
The largest expected area of growth is anticipated to be in single-family homes, which has been slower to recover, and therefore, has the greatest strides to make. Denk expects this sector to pick up in 2016, and even into 2017. “We are above 700,000 new homes, which is pretty good compared to the 647,000 new homes in 2014, but it still only represents a little more than halfway back to normal,” he says. “In 2015 we saw good progress, but we still have the second half of recovery ahead of us.”
Baker also predicts an improved 2016 for single-family growth. “The sense is that we’ll see at least a 10% increase in home building in 2016 compared to 2015,” he says. “We are still in the aftermath of the downturn. Household formation rates have been very low, and those that have been formed have been disproportionately choosing to rent. Some of it can be attributed to difficulty in getting financing because banks are still pretty restrictive. Also, some households are a bit nervous about buying again and the downturn is still relatively fresh in their minds. Lastly, significant portions of the population, particularly millennials, haven’t reached the stage in their life where they would normally be buying. But the recovery is getting under way. We’re seeing some really healthy numbers and we are on the path of getting back to normal.”
WHAT MIGHT DERAIL GROWTH?
While forecasts look promising, there could be hesitations on the horizon. “The labor force is a concern,” says Darcy, “as is the debt load. It’s making it more difficult to secure mortgages and major repair loans. For millennials, the debt load is particularly a problem. That’s why we say we expect growth in 2016, but slow growth.”
Pekel also feels that finances are limiting growth. “It’s still tough to get a loan for big projects,” he notes. “From what we’ve experienced as a design/build firm, banks have been adjusting their lending practices and guidelines to be much more restrictive. In the past, it wasn’t uncommon to see home equity lines of credit being extended for 125% of value. Now, banks are looking at it very, very cautiously. They aren’t lending anything above what comparable value of the area can support. Until we start to see some correction and easing, big projects that were commonplace are going to be the trailing part of the recovery.”
Denk notes that there also appears to be a tug of war between supply and demand that is slowing the recovery and could impact future growth. “A lot of the infrastructure, the pipeline of housing production, dried up during the downturn,” he says. “Skilled laborers found other ways to put food on the table, building material companies laid off workers and land developers simply stopped developing land. We’re starting to see a supply of that infrastructure coming back, but it’s a slow process. All of the players need to be convinced the recovery is stable. That could be a headwind to the recovery, but overall, we’re optimistic. There is still some headway to go and some progress to make on the single-family sector, but we think the economy is going to stay strong and support the housing demand.”
Experts indicate that interest rates are another wild card. “While everyone is very focused on increased interest rates, it’s important to recognize that the Fed has the most influence over short-term interest rates,” says Denk. “Longer-term interest rates that drive mortgage rates are more influenced by the capital markets and what they think about the long-term prospect of the economy. The Fed will increase short-term rates, and they will [likely] do so in the near term. But it’s important to recognize that not a lot of that will flow through to mortgage rates. The…increases really aren’t going to be a major source of problems in the housing recovery. The longer-term rates will stay low by historical terms over the next two years.
“It’s important to remember that during the 1990s, the 30-year fixed rate averaged about 8%,” he continues. “During the 2000s, it was about 6%. Over that 20-year period we still had over 1.2 million housing starts on average, so it didn’t inhibit the housing market then. In the last decade, we had interest rates of about 4% so there’s every reason to believe that mortgage rates could go up 2 percentage points and not harm the recovery at all, and we don’t expect them to rise that full 2 percent for the next two years. We expect that at the end of 2017, they will still be below 6%, so don’t be afraid of the interest rates.”
Hale agrees. “I think a lot is made of the upcoming increase in interest rates that everyone is anticipating,” she says. “Our position is that the Fed moving to a more normal monetary policy is a sign that the underlying economy is healthy…and that is a good thing for the market.”
WHO BENEFITS MOST?
While some areas of the industry have recovered, the dynamics within it have changed from its heyday. In general, Darcy notes that people investing in kitchen and bath projects now are not basing their decisions on increasing the value of their home, but rather trying to accommodate their lifestyle and needs.
“More than half of our members who responded to our annual trend survey said that typical customers are empty nesters and multi-generational households,” he says. “These tend to be the major projects, mid to high-end. Empty nesters are in their peak earning years, which is good for designers who work on those projects. Multi-generational households can also require some significant renovations to accommodate the aging-in-place loved one, so this is all good for the industry.”
Pekel notes baby boomers are another growth area. “In 2007, baby boomers made up less than one-third of all remodeling expenditures,” he says. “However, by 2013, they comprised half. It’s expected that that segment of the market will surge in the next three years because, in part, boomers don’t want to admit their age, or that they’re getting older. And they have no intention of leaving their homes. However, more than 45% of all of the homes in the country have no provisions for aging in place, or for Universal Design. If they want to stay in their homes, there are renovations they have to get done.”
That is good news for the industry, especially as it relates to Universal Design and aging in place, Pekel notes, adding that he is currently working with three clients over the age of 80 who are embarking on major projects. “It’s exciting to work with an educated consumer who may have a physical requirement, but wants to approach the home in a stylistically sensible fashion,” he says. “There also seems to be a general awakening and acceptance that the principles of Universal Design indeed have universal application and go beyond just the boundaries of age by enhancing the living environment for all users.
“Professionals in our industry have an outstanding opportunity to be the smartest people in the room when it comes to assisting those who want to stay in their home. That home is probably paid for, which means the homeowners likely have the financial resources to do it right, and they are looking for professional guidance on how to do that. That’s pretty exciting!”
Most Designers Optimistic About What Lies Ahead
Experts are predicting that 2016 will continue an upward trend toward recovery, and the majority of kitchen and bath designers and dealers surveyed by KBDN feel the same optimism, although many say growth won’t be without its challenges.
When comparing projects on retainer for the fourth quarter of 2015 versus the fourth quarter of 2014, Chris Awadalla, Sanctuary Kitchen Design, in Denver, CO, expects business conditions to be better in 2016. “Our biggest potential growth area is providing services and products for custom built new-construction homes. Our biggest challenge will be balancing our growth with customer service. While we definitely want to increase sales and improve profit margins and the bottom line, ultimately my main goal is to focus on providing a level of customer service that is top notch in our specific market. This will probably mean turning down projects from time to time due to workload. However, I feel that declining a project or two in order to provide a higher level of customer service will ultimately lead to a stronger client base in the long term.”
Steve Zimmer, Remodel Cincinnati, in Cincinnati, OH, expects remodeling to be strong, and he is determined to make 2016 better. “We expect the desire for remodeling kitchens and baths to be strong, especially with growth in mother-in-law suites and extra rooms in the basement for extended family. Our biggest challenges will be finding skilled help, government interference and the rising costs of insurance and materials.”
With several larger projects booked with retainers for the spring and current production carrying through this winter, Regis McQuaide, Master Remodelers, in Pittsburgh, PA, expects 2016 will be a better year. “We also have several projects in the design phase. Room additions or structural changes with a kitchen renovation seem to be hot items for us. Replacing the aging but talented workforce with a smaller pool from which to draw qualified applicants will be a challenge.”
The new year is also off to a good start for Peggy McGowen, Kitchen & Bath Concepts, in Houston, TX. “I predict 2016 will definitely be better, although 2015 has been pretty good. We’re already working on designs for kitchens in new construction for early 2016. In our area, there has been a big increase in new construction of luxury homes, townhouses and condominiums. These developments have already proven to offer immediate growth potential. While the increase of new construction has been good for business, it has also created a shortage of labor for kitchen installations. We are also completely redoing our showroom, so another big challenge will be maintaining ongoing sales while working in a space under construction with piecemeal displays and sawdust until our own construction and installation are complete.”
In Atlanta, GA, Michelle Fee, Change Your Bathroom, sees projects continually getting better from the scope of work to the project prices and budgets clients are allocating for their bathrooms. “Our biggest growth potential lies in trying new things in bathrooms. We have the ideas, but sometimes clients are afraid to implement them into their own bathrooms, whether they are too ‘daring,’ or even too luxurious. Our biggest challenge will be staying ahead of the trends. We like to make sure we are always abreast of the new trends, whether it is styles or products, and we like to push the boundaries and [hopefully] bring in new trends. But the Internet helps usher in new trends faster and faster these days.”
Business in 2015 was good for Rollie Clarkson, Remodeling Contractors, in Johnston, IA. “Things got on a pretty good roll last year, and I don’t see a slowdown in our area. I see people willing to do some pretty extraordinary things to their houses. Many are willing to go further with a project, not backing down from higher-end materials and products. More people are wanting to drive the BMWs (nicer projects) over the Chevys (lower-priced projects). Labor force and subcontractor availability will be our biggest challenges. We are fighting that now, and I don’t see it changing much. It will be a great opportunity for unemployed or under-employed workers to get into the trades and make a decent living.”
John Arnott, Wright Associates, Atlanta, GA expects business in 2016 to be about the same, “with a hopeful slight increase. The limiting factor is limitations in contractor capacity. Most are booking business out into the new year quite a ways. Our challenges are with ‘old thinking’ and an unwillingness to explore new ideas and product utilization. Business can outstrip supply of trained labor and products in demand.”