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Housing revives, and so do home improvement chains

Mitchell Hartman Mar 7, 2013

Housing revives, and so do home improvement chains

Mitchell Hartman Mar 7, 2013

There have been multiple signs of a comeback in the crucial housing sector in recent weeks. It’s a sector that typically leads the way out of recession, but has lagged badly in this recovery.

In January, existing home sales were up 15.6 perecent. New home construction is expected to rise steadily this year, and home prices are climbing across the country.

Connect the dots — and you get to Home Depot and Lowe’s. The big home improvement chains reported higher sales and predicted continuing growth when they released earnings this week. They’re also hiring up for the spring shopping season.

Debbie Kitchin of InterWorks general contractors is a steady customer of the big chains, as well as local suppliers to the professional trade. She was giving a tour of a quaint little bungalow her firm is renovating in Portland, Oregon. The house, about 1,600 square feet, recently sold for $225,000. It’s in an older residential neighborhood of streets lined with towering fir trees, where the real estate market is now brisk again after the housing slump of the late 2000s.

The rehab on this house is top-of-the-line. InterWorks and its subcontractors are installing new floors, kitchen, master suite, insulation, energy-efficient windows. The new homeowners are empty-nesters, recently retired, who sold a larger, more expensive house in the suburbs, in order to move closer to their daughter and new granddaughter in town.

But Kitchin says a lot of her clients are staying in their homes — which now seem to be worth something again.

“People have deferred making improvements in their homes,” says Kitchin, “because of the recession and because the value of their houses was going down. Now that they see it’s starting to turn, they feel like, ‘well, maybe it’s safe to invest in my home again.’”

Meaning, InterWorks is growing again. After downsizing from 13 employees down to four employees during the recession (and they often didn’t get full-time work), the firm now has full-time work for about half-a-dozen workers, including skilled carpenters who make as much as $25/hour. The subcontractors on the job have ‘For Hire’ signs on their trucks as well.

Which also means  that InterWorks is buying a lot more stuff. “Wood, insulation, paint, tile, flooring, whether it’s carpeting or hard-wood flooring,” says Kitchin. And the list goes on.

And that is keeping the folks at construction material and home improvement suppliers plenty busy. Home Depot will hire 80,000 seasonal (i.e., temporary) employees to handle the spring sales rush in coming months. That’s 10,000 more than last year.

At a Home Depot store in a suburban mall in Vancouver, Washington, across the Columbia River from Portland, permanent employees and new temporary hires were busy setting out the spring displays this week — including landscaping supplies and building materials for homeowner DIY projects.

“A lot of contractors that actually may have gone out of work for a while, they’re going back into remodeling,” says store manager Robert Tilton. “And they’re building spec homes, getting a lot of support through interest rates and an easier process of getting commercial bank loans.”

Tilton says more homeowners are flocking into the store too — getting ready to sell their homes, or just to live a little.

“The biggest do-it-yourself projects right now seem to be a lot of landscaping, curb-appeal type items, interior-exterior paint jobs,” says Tilton. “It’s a very inexpensive way to add a good look and feel to your home while adding value.”

Michael Farr follows the home improvement sector at investment firm Farr, Miller & Washington. He calls this a genuine housing recovery, but not a robust one.

“It’s something of an anemic rebound, we’re limping out.” says Farr. “But you don’t want to look a ‘gift rebound’ in the face when you get it.” He points out that residential investment averaged around 4.5 percent of GDP from World War II until the end of the housing bubble in 2007-2008. It was 2.4 percent of GDP last year.

And, Farr points out, even as consumers have deleveraged through the recession, American households still have a lot of debt left on their balances sheets (debt to household income doubled from 1980 to 2000, driven in large part by inflation in home prices and the boom in home equity loans). Home prices are now on the rise, but they haven’t rebounded nearly enough to provide an equity cushion for many homeowners to borrow against, in order to fund big home-improvement projects.

But at least that kind of investment is getting less risky from a financial standpoint, Farr says.

“People want to know that if they invest more money in their homes to repair or refurbish, they’re going to be able to get that money out, that it’s going to be worth it,” he says. “You don’t want to try and repair a house that’s simply falling in market value.” Now that home prices are rising steadily in most local markets, home-improvement spending prior to putting a home on the market appears to be a better bet.

But economists warn that this renovation recovery could still falter. Home prices have to keep rising, or homeowners won’t be able to get back what they put into their homes when they sell. And interest rates have to remain low, so people can keep refinancing their mortgages, then plowing that extra money into new kitchens and fancy shrubbery.

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