Remodeling rebounds to prime distressed houses for sale

With more distressed properties in need of repairs before resale and more homeowners focusing on improvements with long-term rewards, the remodeling industry appears to be emerging from its worst downturn in recent years.

That was the message of a report by the Joint Center for Housing Studies at Harvard, "A New Decade of Growth for Remodeling," presented Thursday at the International Builders Show in Orlando.

"As both the economy and the housing market stabilize, so, too, will homeowner improvement spending," said Abbe Will, a researcher at the joint center.

In the next decade, remodeling expenditures are expected to increase at an inflation-adjusted 3.5 percent average annual rate - below the pace that prevailed during the housing boom, Will said, but sharply recovering.

How bad has it been?

Total spending on all remodeling, both owner-occupied and rental units, which exceeded $325 billion in 2007, fell to $288 billion in 2009.

Spending on upper-end discretionary projects, such as home additions, fell 23 percent.

The share of total spending by the top 5 percent of homeowners fell from 60 percent to 52 percent.

Thanks to federal energy tax credits, however, spending on professionally installed energy-related replacement and upgrade projects fell less than half as much as overall home-improvement expenditures.

The number of homes repossessed by lenders reached a record 1 million in 2010, and at least 1.2 million are projected for this year, according to RealtyTrac Inc., of Irvine, Calif., which tracks foreclosures. Some of these distressed properties beg for remodeling before resale.

"Keep in mind a foreclosure situation does not occur overnight," said Noelle Barbone, who manages Weichert Realtors' Media office. If a homeowner had no money for the mortgage, it usually means there has been "no money to make repairs or do regular maintenance."

Typically, Barbone said, a house is repossessed by a lender "who is looking at an 'inventory list,' and does not have a system in place to physically visit the properties in their inventory - and no budget to make repairs anyway."

Thus, after such a house is sold by the lender at a much lower price, it is the buyer who is generally hiring the contractors, she said.

Right now, most of the work getting repossessions ready for resale is happening in the high foreclosure areas of the South and Southwest and in California, where such sales are expected to increase 45 percent in 2011.

Jess Rankin, of Junk Eviction L.L.C., of Phoenix, said that when you walk inside these houses, the full force of how angry people are about losing their houses hits you immediately.

"Not only is the house filled with trash, but they've taken everything they could - appliances, carpeting, cabinets, flooring, and even sections of air-conditioning units, which you need to sell houses in the desert," Rankin said.

In the Philadelphia region, where the volume of distressed housing is lower, remodeling contractors are focusing on staying afloat until the market improves.

Woodbury remodeler Jay Cipriani, who tackled as many as 100 major remodeling jobs annually before the economy went sour, said he was handling "smaller projects," such as kitchen and bathroom renovations.

Those one- and two-story additions that constitute upper-end discretionary spending? "We're not doing a lot of additions these days," he said.

In 1998, there were predictions that the day would come when remodeling would be bigger than new-home construction. Builders meeting in Dallas were told that new houses had a built-in flexibility that made renovation easier and more cost-effective.

And, the builders were told, if houses appreciated at or below the inflation rate, homeowners could not accumulate the equity necessary to buy bigger houses to meet their growing needs. Renovation was the only option.

Neither the real estate boom nor the bust was forecast by industry seers back then, yet their predictions may be coming true.

In the next five years, industry observers say, the focus of remodeling spending will be on replacements and systems upgrades, with growth opportunities for contractors generated by underinvestment in distressed properties, lower mobility, changing migration patterns, and the rise of environmental awareness.

"Lower household mobility following the housing-market crash means that in the coming years homeowners will increasingly focus on improvements with longer paybacks, particularly energy-efficient retrofits," said Kermit Baker, project director of the Joint Center's Remodeling Futures Program.

"A slowing of migration to traditionally fast-growing Sun Belt metro areas means that, at least temporarily, more remodeling spending will remain in older, slower-growing areas in the Rust Belt and in California," he said.