A Reason To Believe
Higher interest rates should cool off the housing market in
2000, but the continued push toward kitchen and bath remodeling
should kick the new millennium off on a positive note.
by Daina Darzin
It’s the time of the year when analysts and businessmen
throughout the kitchen and bath industry are peering into their
economic magic Eight-balls and, for 2000, the answer seems to be,
“outlook is good.”
“There’s a lot of optimism about the year 2000,” comments Brett
Martin, a spokesman for the National Association for the Remodeling
Industry, in Alexandria, VA. “We expect it to be better than
1999.”Many others, though, are not nearly that optimistic, even
though they assert that 2000 should be another very solid year for
the housing, remodeling and kitchen/bath industries.”We’re not
going to approach the level we had in 1999,” predicts Kory Bockman,
an economist with the National Association of Realtors. “Last year
will probably be a record for all aspects of the housing industry.
Everything just fell into place. We had low interest rates, low
mortgage rates, strong job gains, strong productivity gains and
income gains without causing inflationary pressure. We also had
exuberant consumer confidence as a result of the booming stock
Dick Titus, executive v.p. of the Reston, VA-based Kitchen Cabinet
Manufacturers Association, notes that 1999 proved to be a banner
year for cabinet manufacturers, who’ve reported double-digit gains
in cabinet and vanity sales for seven of the last ten months.
“However, a slowdown in the economy and the housing sector in
2000 is viewed as virtually inevitable,” Titus points out.
“Depending on what happens with interest rates, the impact could be
felt more in the housing industry, which is sensitive to interest
Total kitchen and bath cabinet demand, in fact, is expected to
decline slightly this year, according to the latest estimates from
the KCMA, which projects total cabinet demand in 2000 to be 78.8
million units, down 1% from an estimated 79.5 million units last
year (see graph). The decline, according to the KCMA, will be
attributable to an anticipated decline in new residential
construction. In contrast, cabinet demand in remodeling is expected
to increase again in 2000 after posting yet another gain in 1999
and should account for 75% of the total U.S. cabinet market this
year (see related story, Page 48).
Among the factors responsible for the success of 1999, economists
say, was an influx of money from overseas markets, as the Asian
financial crisis prompted people to look for a safe market in which
to put their money. “Clearly, the wealth effects [of a booming
stock market] have been very powerful in the last few years,”
observes Maury Harris, chief economist at the New York-based Paine
The stock market has been rising by some $2.2 trillion a year,
contributing about $45 billion annually to personal spending,
Harris notes. But 20%-30% increases in stocks are “a thing of the
past,” he asserts. “We don’t think the stock market is going to go
up as fast in 2000 as it has in the last couple of years, so the
incremental wealth effects won’t be a strong. Instead of 25%-30%,
maybe it’ll be 10%.”According to Robert Barr, a senior economist
with Fannie Mae, personal spending has powered the recent economic
boom, and while consumer confidence remains strong, there may be
signs of a slowdown already in place.
“A lot of consumer spending has been fueled at least in part by
the wealth-effect of the stock market,” Barr explains. “If the
stock market continues to go down or move sideways, it will remove
one of the impetuses for continued consumer spending and may also
affect remodeling jobs and home purchases.”
Even so, many economists believe that the effect of rising home
prices on consumer spending is more pronounced than that of rising
stock prices. According to Federal Reserve chairman Alan Greenspan,
roughly one-sixth of the rise in consumer spending in recent years
is attributable to rising home prices.
For the residential construction market, three key factors to
watch in 2000 and beyond, Barr suggests, are household growth which
remains strong job growth and worker productivity.
Other analysts are also cautiously optimistic. “[The economy] is
going to grow, but not as fast as it has been,” believes Thomas R.
Loy, an economist with the FMI Corp., in Raleigh, NC. Forecasts for
2000 might be reflecting another record year except for one factor
higher interest rates, which are expected to slow the pace of new
housing starts and choke off refinancing and home equity loans.
“Dr. Greenspan is . . . going to keep raising interest rates,”
explains Loy. “[But] I think we’re all going to keep spending money
until we get afraid a little bit and what’s going to make us afraid
is the fact that our neighbor has lost his job. At that point, our
confidence will begin to drop.”
The result of that eventual decline in consumer confidence, he
explains, will be less spending and more of an effort to pay off
consumer debt. Harris adds that the predicted drop in housing
starts has “got to affect the kitchen and bath industry in terms of
new construction. We’re [also] seeing a cutback in existing home
sales” from a peak period. In terms of good news, Harris predicts
that inflation and unemployment will both remain low, helping to
ensure a stable economy. Bockman agrees, forecasting a strong first
quarter with a leveling off throughout the year.
The remodeling sector, as in the recent past, will continue to be
largely responsible for fueling kitchen/bath industry growth,
according to most analysts.
“The aging of baby boomers, rising U.S. home ownership rates,
and the sharp increase in the number of aging American homes will
continue to produce solid growth in the remodeling market,”
explains the KCMA’s Titus.
Recent increases in the homeownership rate and home prices “have
been creating a stronger image of housing as a good investment”
while adding to homeowner equity, and have been stoking both
consumer confidence and the demand for remodeling jobs, notes
National Association of Home Builders chief economist David
Indeed, the forecast for overall U.S. residential remodeling
expenditures is positive. U.S. expenditures for residential
improvements and repairs should amount to $128.4 billion this year
up from the estimated $126.7 billion spent in 1999 according to
Seiders and the NAHB.
Conventional wisdom holds that the new construction and
remodeling sectors are contracyclical if people aren’t buying new
homes, they might be more inspired to remodel the ones they have.
But experts disagree as to whether this is actually true. “That
historically has not been the relationship,” says Kermit Baker,
director of the remodeling futures program for The Joint Center For
Housing Studies at Harvard University. “The years that you see real
strong remodeling activity are the years you see real strong new
construction. The markets move up together.”
Counters NARI’s Martin, “When people have bought what they
consider to be a starter house and they like the house, the
neighborhood and the school they’d rather take the money for a new
home and turn their current home into their dream home. That seems
to be a popular trend.”
“Most people are looking to improve the quality and enjoyment
they get out of their home,” Bockman comments. “When people make
modifications, they choose things they personally enjoy. That tends
to add value to the home anyway.”
“We’re seeing a lot more upscale projects,” agrees Martin.
“Evidently, people have that money right now.” Even with a
middle-class budget, “People have a little more money so they want
to do a little bit extra.”
“A lot of remodeling seems to be triggered by changes in
household composition, both bigger and smaller,” explains Baker.
“When households downsize, [for instance], a kid moves out to go to
college, [or] even a death, it changes the way a household is using
that home.” This prompts a reconfiguration of space, for instance,
making the college-bound child’s room an exercise room or home
office. Experts also agree that consumers don’t start remodeling
the instant they move into an existing home, preferring to
stabilize their budget after mortgage, closing costs and other
expenditures. Loy puts the estimate for major renovations at six to
12 months after moving; Baker says it’s more like 12 to 18 months.
The market for new kitchens and baths is split into several
demographic groups, experts say. “The younger buyers, families
starting out, tend to buy existing homes and fix them up,” believes
Bockman. “They generally don’t have the capital to get into a new
home. Newer homes are typically going to people who have older
children who have gone on to college so they want to move into a
home that doesn’t take much effort to maintain.”
But Baker says the most extensive remodeling occurs with
trade-up, older buyers rather than younger ones, because they have
the financial resources to make all of their dream house wishes
come true. “The peak time [for remodeling] is when households are
in the 35-44-year-old group,” he notes. However, 50ish empty
nesters are also likely to do one more remodel to ready the home
they’re going to grow old in. Remodeling activity drops sharply
after age 65, notes Baker, with any projects thereafter likely to
be a matter of necessity more than choice.
Despite all the good news regarding remodeling activity,
however, at least one analyst sounds a note of caution over the
prospects for a perpetually expanding market: Remodeling, he notes,
is not a repeat purchase.
“There’s been above-average growth in this area,” says Paine
Webber’s Harris, “[but] if you’ve already done it, it doesn’t
matter how much money you made in the market, you don’t want to do
it again for a while.” KBDN