A 2002 filled with surprises, unexpected fluctuations and a
robust kitchen/bath market leads to a cautiously optimistic
forecast for 2003 unless, of course, there’s a surprise.
By Daina Darzin Manning
It was a year that brought new meaning to the term, “the best of
times, the worst of times.”
The stock market plummeted amid corporate scandals that left
consumers feeling betrayed and mistrustful but housing starts hit
robust levels. The mild recession forecast for 2002 turned out to
be deeper and longer than expected but mortgage rates dropped to
40-year lows, prompting unprecedented levels of refinancing, and
often allowing homeowners to put cash back into their homes in the
form of remodeling. High-end clients were hard hit by trillions of
dollars in stock market losses but most high-end remodelers have
more work than they can handle.
Uncertainty, and an element of surprise, reigned over an overall
strong year for housing and the kitchen/bath market in 2002. And,
that prescription is likely to continue in the New Year, according
to housing analysts, kitchen/bath professionals and trade
association officials surveyed by Kitchen & Bath Design
“There were a lot of surprises [in 2002],” says Timothy Aylor,
an economist for the Raleigh, NC-based FMI. The first one, he
notes, was that “The recovery wasn’t quite as big as we first
[predicted]; we were in this deeper than we thought.”
“We were in recession at the end of 2001, and out of it by the
end of 2002, though no one has declared the recession over yet,”
observes Kermit Baker, of the Joint Center for Housing Studies at
Harvard University. “The year started out fairly strong and
weakened through mid year.”
“We expected a more systematic economic recovery,” agrees David
Seiders, chief economist for the National Association of Home
Builders, who cites “unforeseen shocks to the system” as the
reason. “The trust factor in corporate America, the further
decimation of the stock market, and all the uncertainties in the
Middle Eastthese things have taken the starch out of the
“[The market] has been dragged down by some of these corporate
accounting scandals,” comments Kevin McNulty, executive v.p. for
the National Association of the Remodeling Industry. It’s worn down
the psychology of the investor.”
A decline in manufacturing, softness in the job market, stagnant
inventories, a slowdown in capital spending and lingering woes in
the technology sector certainly didn’t help, either.
Ironically, though, all these economic problems created a
tremendous housing and remodeling market in 2002, industry analysts
agree. Housing, in fact, staged almost a miraculous performance
throughout the past year, becoming a virtual pillar of strength for
the economy and helping stave off an even-deeper downturn.
“The housing sector has come through this with better numbers
than we anticipated,” Seiders states. “The key is the interest
rates which occurred because of these other problems. In addition,
house price behavior has been great.”
“The last year was a banner one for the housing and real estate
industries,” agrees National Kitchen & Bath Association
president Les Petrie, CMKBD.
Indeed, housing starts fueled by positive affordability surged to
1.6 million units in 2002, while sales of both new- and
existing-homes ascended to all-time records. At the same time, the
U.S. residential remodeling market, driven largely by favorable
population trends, an aging housing stock, changing lifestyles and
other key factors is expected to grow to roughly $170 billion in
All this has resulted in a surge in shipments and sales of
kitchen and bath products. Cabinet/vanity sales have increased over
the previous year for some 75 consecutive months, according to the
Kitchen Cabinet Manufacturers Association (KCMA). Domestic
shipments of major home appliances reached record levels in 2002,
with even more growth in sight this year, the Association of Home
Appliance Manufactuers (AHAM) reports. Shipments of other key
products such as plumbingware and countertops remain robust (see
Barometers, Page 8). Most kitchen/bath dealers and suppliers report
favorable levels of activity.
Normally, remodeling is something that should decline with a
rise in unemployment and weak job growth, notes Baker, adding that
homeowners generally avoid big-ticket, discretionary purchases in
that type of environment. However, low interest rates continue to
have a dramatic effect on home-related purchases, Baker and other
economists point out.
“As the stock market continued to perform poorly, investments in
real estate are [perceived as] more solid, and are doing much
better,” notes Dick Titus, executive v.p. for the KCMA.
Emotional factors including the events of Sept. 11 have also played
into people’s desire to turn increasing attention to the home, as
have favorable demographics (see related story, Page 54). “Nesting,
or centering on the core family, being close to home, those are
real things,” says McNulty.
“People became more family- and home-oriented,” Titus agrees.
“That helped maintain the strength of the remodeling market.”
In addition to low interest rates, “cash out” financing has also
helped buoy remodeling.
The current lending environment has not only spawned the lowest
mortgage rates in 40 years, it has also unleashed the greatest
torrent of home refinancing ever producing an atmosphere in which
cheap borrowing and escalating home values have enabled millions of
Americans to tap home equity by taking cash out of a refinancing
deal or through a second mortgage.
“You refinance your mortgage and take extra cash out to pay off
unsecured debt,” explains Baker. “About a third of that cash is
used for home improvement. That’s a huge influx of cash into this
When people refinance, “more than half [of them] take a larger
loan amount than is necessary to pay off the previous debt,”
confirms Lawrence Yun, senior economist for the National
Association of Realtors. “Refinancing activity in 2002 is
anticipated to be a record. Many people are recognizing that home
prices are rising very fast, and [that remodeling the home is] an
The 2003 housing market while strong from a historical perspective
is expected to be somewhat off from robust 2002 levels that many
housing industry analysts considered virtually unsustainable.
Most housing analysts see housing starts declining in 2003,
although still remaining above the historically strong level of 1.6
million units. Existing single-family home sales which hit a record
5.47 million units last year are also expected to decline to about
5.27 million units this year. (That would still rank 2003 as among
the housing industry’s best years in history.) Similarly, new
single-family home sales also coming off their greatest year in
history, at 945,000 units are expected to decline to 921,000 units
in 2003, still extremely high by historical standards (see
The National Association of Realtors sees 30-year fixed mortgage
rates pretty much holding at current levels of just under 7%
through 2003 more good news for the market. At the same time, home
prices are expected to continue to rise although less dramatically
than in 2002 while the nation’s homeownership rate should resume an
upward trend and remain at, or near, record levels of just under
Barring unforeseen developments, long-term conditions are
favorable, as well. In fact, according to David Berson, chief
economist with Fannie Mae, the coming decade could be even stronger
than the one that just concluded. Housing value, placed at $11
trillion today, could well be $21 trillion by end of the decade,
And NKBA’s Les Petrie adds, “The upward trend in the stock
market is easing the concerns of many high-end purchasers and it
would appear that we can anticipate a positive business climate for
the near future and beyond.”
With all of 2002’s favorable factors still in play, there’s a
general sense of optimism regarding 2003. There’s also, however, a
distinct sense of uncertainty particularly in the face of
unexpected domestic and global events, such as a war with Iraq.
On one hand, there’s the strong feeling that the housing market
and related kitchen/bath sector will remain vibrant in 2003,
against a backdrop of a steady overall economic recovery, a
stabilized stock market, continued low inflation, improved
corporate profitability, an easing of unemployment and interest
rates that should remain historically low.
On the other hand, analysts are well aware that there’s a couple
of wild cards present. And those wild cards bear careful watching,
“Mortgage rates have been unusually low,” Baker asserts. “Since
no one predicted them going that low, should one be concerned that
they’ll be spiking higher than anyone is calling for?”
Baker adds that, “We’ve used up any pent up demand [among
consumers]. There is the concern that maybe we’ve gotten ahead of
There are parallel fears that a price bubble, wrought by wildy
escalating home values, could damage housing in some local markets
although most housing analysts do not foresee this on a national
level. And, paradoxically, a greatly improved stock market could
actually hurt the housing market by prompting a jump in interest
An even more prominent and unpredictable wild card is the
specter of war and the economic impact it could have.
“It’s the uncertainty that’s the big problem,” explains Seiders.
“It causes everybody just to hold back. As soon as it’s clear
what’s going to happen, things are gong to improve.”
“You get these dire predictions and you just have to wait and
see,” says Titus. He cites a worst case scenario where, for
instance, the rising price of oil prompts a worldwide depression,
but he feels this dim view is exaggerated.
“Despite its impressive statistics, 2002 will end with more
questions than answers about how the economy and housing will fare
in 2003,” says David Lereah, chief economist for the National
Association of Realtors.
“The possibility of a ‘double dip’ recession, a prolonged war
effort, rising oil prices and the psychological residuals of
corporate scandals still weigh heavily on our minds.”
And each of these factors could impact homebuying decisions in
2003, Lereah notes. “The good news for housing is that such a
double dip recession means downward pressure on mortgage rates,
making homebuying more affordable. The bad news? It also means a
fall in consumer confidence, jobs and income gains, which could
inhibit the demand for homes,” he states.
Yun says his forecasts for 2003 incorporate the possibility of a
war by projecting larger spending for defense, but notes that a
prolonged conflict could lead to higher oil prices, inflation and
higher mortgage rates.
Similarly, Baker notes, “There’s nothing worse than uncertainty
in the marketplace, so once [the conflict] gets resolved, that will
be a plus. Again, you can imagine a scenario where it doesn’t get
quickly resolved, where it drags on. That could totally disrupt
energy markets and oil prices. It could cut into trade, and
potentially decimate our economy.”
In that case, Baker says, “all bets are off.”
With all of these factors to build into their 2003 business plans,
most kitchen/bath dealers and designers interviewed by K&BDN
regional differences aside remain cautiously optimistic over
prospects for the next 12 months.
Most agree, however, that 2002 was, in fact, a pleasant
“I felt that, after the magnitude of [9/11], the work I do
became rather frivolous,” recalls Rebecca Gullion Lindquist, CKD,
CBD, of the Duluth, MN-based Lindquist and Co. “Most of my clients
in reality don’t need [new] kitchens and bathrooms. They’re
upscale, they live in nice homes. There were other things that were
so much more important. I remember thinking, ‘well, that’s it for
Instead, after a brief interlude, Lindquist reports her clients
started calling to say they wanted to go ahead with their projects.
As a result, she notes, “this last year has been our best ever. Our
business has been up 25% over the previous year. It’s been
Lindquist believes that clients wishing to re-invest money, and
divert it from the stuggling stock market, is one reason they’re
pushing ahead with remodeling. She also credits the trend toward
cocooning. “I’ve also had people say to me, ‘why are we putting
this off?’,” she adds. “Maybe life is just a little bit more
fragile than people thought. [So they think], ‘if we’re going to do
it, let’s do it now.'”
Gail Drury, CKD, CBD, owner of Drury Design, in Glen Ellyn, IL,
agrees that “2002 went way beyond our expectations; it was
Drury was greatly relieved with this uptick in business,
especially since her company was moving into a larger showroom in
the autumn of 2001, and business went into a slump in the aftermath
of the 9/11 tragedy. But it rebounded strongly in the first quarter
of 2002 and wound up 20-25% over the previous year.
Drury credits low mortgage rates, as well as people’s nesting
instincts and reluctance to travel. “People are realizing their
home is a better investment than the stock market,” she comments.
“Home values have consistently gone up, year after year.”
For many West Coast businesses, 2002 was somewhat of a
disappointment. “I knew it was gong to be soft, but I thought we’d
recover [more quickly],” says Jeff Burton, owner of The Bath and
Beyond, in San Francisco.
Burton blames the Bay Area economy overall. “The banking
industry’s moved out, the ‘dot-commers’ are gone, and Silicon
Valley is depressed,” he reports. “The general economy is cautious.
Even though we’ve got great refinancing rates now, everybody’s just
Burton is highly optimistic about the future, however. “I think
the pent up demand is going to be phenomenal,” he comments.
Similarly, Jim Wallen, CKD, of the Oakland-based Acorn Design
Studio, notes that business was better than expected through
mid-2002, but then dropped off. “I think people are concerned about
going to war,” he observes. “People are uncertain of the impact
[war could] have and they’re being conservative.”
“I think it’s going to be another good year,” says Lindquist.
“Whether it will be like 2002 that would be nice, but I’m not going
to count on it. I always approach my business very conservatively.
We really watch our overhead costs.”
After 25 years in business, she says, “I know we could weather
some pretty adverse conditions.” She adds, however, that she plans
to step up her marketing plans, which are usually minimal for her
“I’m a little cautious [about 2003] because what goes up has to
come down,” agrees Drury. “I realize this [the current pace of
business] might be a little too good to be true. I think it will be
good for six to eight months and then it’s going to slow down.”
Wallen reports he’s proceeding by “not spending any money on
stuff I don’t need to spend on.” He believes economic prospects for
2003 are uncertain, and says he plans to cut back in some areas for
example, shelving a program to introduce retirement plans for his
employees and canceling plans for new displays.
Burton expects that pent up demand in his market will take hold by
the second half of 2003. “I don’t think the stock market is going
to come back for several years,” he notes. “And people have to do
something with their money. They don’t want to be sitting there
making 1-1/2% and getting taxed on half of that. They might as well
put the money into their homes.” KBDN