Ep. 11 home improvement transcript

Presenters

Kristen Hallam (host)

Scott Hazelton (guest)

Presentation

Kristen: You’re listening to The Decisive Podcast, insights and analysis to empower confident decision-making.

Welcome to another episode of The Decisive Podcast. I'm your host, Kristen Hallam, Lead Content Strategist for Global Intelligence and Analytics at S&P Global Market Intelligence. Joining me is my S&P Global Market Intelligence colleague, Scott Hazleton, Consulting Director, responsible for our bespoke construction and home improvement work. We're going to talk about the market for home improvement. Scott, welcome back to the podcast.

Scott: Thanks, glad to be back.

Kristen: Scott, you're getting ready for the Home Improvement Insights Summit in Chicago, which is one of my favorite cities. Tell us a bit about the summit, who attends, and what kinds of insights those attendees expect to get.

Scott: It's a very data-driven conference. This is not a PowerPoint vacation. Typically, it's analysts from various companies who are making their presentations. The attendees tend to be planners, sales, and marketing, from home improvement product manufacturers and home improvement outlet stores, for example, some of the bigger chains. The speakers are typically from industry specialists who give a unique perspective on their marketplace. What people will take away from that is what drives the market again and again, but not the same story.

So, what drives the market for a consumer looking for home improvement products? What drives it for the professional home remodeler? What facilitates brand loyalty from both those marketplaces? What trends would be happening with things like smart homes or demographics, aging in place, for example? There are various topics that can be as generic as total consumer home improvement or specialized as unique demographic segmentation characteristics.

Kristen: So what are the main factors that influence spending on home improvement, Scott?

Scott: There are the classics: interest rates to the degree that you're financing a major home improvement, personal income growth, or household net worth, to the degree that you're funding yourself either through cashing out, equity of some sort, or financing it through normal income channels. So those are traditionally the big ones.

Consumer confidence, of course. You have to have some degree that, this long-term investment is going to pay for itself. Although to some degree, it is also a nice-to-have because you live there. So it doesn't have to have a pure payback, but you don't want to, you know, lose money on it.

Government incentives can be a part of this, IRA, the Inflation Reduction Act, which really had a high energy component to it – pretty substantial tax credits there for things like, heat pumps, solar installations, wiring your garage to handle electric vehicles, for example. So those are driving it and to a degree that we've not seen before.

Of course, general energy conservation has always been a driver. I think the IRA has accelerated some of that spending, but it is the core economic terms. And then it's the nearer-term trend drivers. Home improvement spending is also a function of automation as we want our homes to be smarter and smarter. That typically means installing software and systems to make that all happen.

Kristen: All right, lots of different factors there contributing to the market. Maybe we should take a step back and define what it is that we mean by home improvement. Does it have to be a major renovation, Scott, or can it be as simple as a new coat of paint?

Scott: Yes, it can be as simple as a new coat of paint and as home improvement, it’s anything that maintains or extends the value of the home. So it can be an addition. It can be expansions, it can be remodeling, but it can be some repair work. If you replace your kitchen faucet, that would be considered home improvement.

If you change light bulbs, that actually is not home improvement. So there's some gray area between maintenance that has to get done and repair that maintains value. But, yeah, it's a pretty broad spectrum of activity that goes into what we call home improvement.

Kristen: It's too bad the light bulbs don't count because that would be the only home improvement I've done in a while.

Scott: For example, is a lawnmower a home improvement item? I would say in general, yes, mowing the lawn is maintenance, but lawn and garden activities are considered home improvements. So there are some gray areas where the reason becomes the defining mechanism. And that's like when I bought an electric chainsaw, which was meant to take apart tree that fell down.

Is that home improvement? Because if I don't take the tree apart, the home value drops. But there again, electric chainsaws, the energy efficiency, there's a rebate in Massachusetts on electric chainsaws. And some of these newer ones are very powerful.

And, yeah, they're not as long cutting as a conventional gasoline-powered one but they'll do some serious work out there.

Kristen: All right. I'm going to keep this in mind next time I drop a packet at the garden store. I'll tell myself I'm doing some home improvement. With that definition in mind, what is the current state of the home improvement market, Scott?

Scott: This year is a pretty tough year. Tough as in, you know, probably down small single digits, but considering where home improvement has been, it seems like a down year because it was such a long boom, even pre-COVID. We were in pretty good straits, very strong in 2020, 2021, and it's going to be, there's a base effect of tailing off there.

And you add to that a ho-hum economy and consumer confidence that's relatively weak. You get a pause in spending. So right now, that market is a little bit challenging, but a strong past and I think a pretty optimistic future ahead of us.

Kristen: Let's talk about how these home improvements are getting financed, particularly in a high interest rate environment.

Scott: It’s certainly high interest rates by comparison to recent history. It's not high compared to back 20 years ago or something, but you're right.

It is a high interest rate environment and we will see the Fed cutting rates, we think very quickly, probably September, for 25 basis points and probably 25 basis points, I think, twice next year is our macro view. Yes, they're high, but they are trending down. So, to the degree that you're financing these things with credit, that will get better.

And of course, if you've got a home already and you're using home equity credit, you've got a better rate than you would if you were using a credit card or something by far. You can fund it from other assets, which the stock market has been a bit of a yo-yo, but in general, it's been up for the past couple of years. So you could decide to cash out and do it.

In some cases, you have life events where you have to do it, such as the birth of a child or a parent who needs care, in which case you may have other family members who will help out with that investment.

Kristen: What about properties like hotels, Scott?

Scott: Technically, home improvement doesn't count for hotels because it's not a home; it's a commercial building. However, it's an interesting story for a couple of reasons. One is post-COVID; what did we not need? Hotels. What did we need? Multifamily housing. It's actually relatively easy to convert hotels to multifamily housing. It's really hard to convert an office to family housing.

We've had some conversions of hotel properties, and we've now had a pretty good recovery of the economy. We actually have got markedly too few hotel rooms, so hotel construction is a little tough this year because of those high interest rates. But it's had a couple of good years and has some very good years coming. Partly it's that recovery of lost rooms, but also think back to the last time we were really happy on the non-residential construction side. It was 2004, 2005, and 2006, before the Great Recession in 2007 and 2008.

So we have a lot of hotel properties and other commercial properties, for that matter, that are this magical roughly 15 to 20 years old, and that's when you typically require major renovations to building. So we have this sort of sweet spot coming up where maintenance will be required and when you have spending of more than some fraction of a building's value, depending upon the local regulatory authority, that can trigger other spending. So if you want to refurbish all the rooms, you may be required to upgrade your electrical system, your HVAC system under, you know, IRA. You might be required to upgrade your fire alarm systems based upon local ordinances. So you can get a multiplier effect on commercial buildings that you don't typically see with a single family home and so that you can get that for the multifamily housing.

Kristen: Interesting, interesting perspective there for buildings that are residential in nature, but also commercial in nature. Now, as you hinted at earlier, our current expectation is that the Federal Reserve will pivot and cut rates starting this year with additional cuts sprinkled throughout 2025.

What impact might that have on the home improvements people make and that sales mix that you talked about earlier?

Scott: So we have a bit of a log jam in the housing market in that housing starts are relatively tame. New homes for sale is a tight inventory. Existing homes for sale is also a tight inventory.

And so, with this locked up system, we aren't getting the usual conversion of buyers, especially of existing homes, which tends to drive a lot of home improvement activity. You upgrade, typically, bathrooms, kitchens when you buy a new-to-you home, that's not brand new, that's been stalled with the weaker sales, which is probably a function of rates.

As rates come down, we do improve affordability somewhat and you get a little more churn in the marketplace, which you really want to have. Yeah, there are seniors who would love to trade down, but right now can't. There are first time buyers who’d like to get their first house and right now can't. And so that has to get unleashed and lower rates will help with that.

The impact to home improvement spending has been, if you can't move or you can't afford to move, then you have to maintain the home. What we've seen for the past couple of years, and I think through 2024 and into early next year, we'll still see this, which is that you're replacing or repairing systems that just need to be maintained, so, windows, roofs, and to some degree siding, to maintain the structural integrity of the home, to keep it in good shape for a future sale.

You're not seeing the more discretionary spending on kitchen cabinets that would follow a better housing market. As we look at 2025 and 2026, we see those trends reversing themselves, and we'll get a little more of the whole house remodels and a little less as a share of total of the roofing, siding, windows, and doors.

What this means is that the professional market has been relatively strong because you need the pros for big whole house additions. Typically, homeowners don't try to roof their own house. Some brave souls do that, but most don't. So the pro market has actually held up better than the consumer market in the past couple of years.

Kristen: I want to get back to the pro market and particularly the labor picture in a minute, but first, I want to ask you about the cost and availability of materials for home improvement. I think when we first spoke about home improvement a couple of years ago, we were coming off a time when lumber prices were really high, for example. Has that normalized post-pandemic, the cost and availability of materials?

Scott: Yes and no, so, the good economist answer. But the inflation in home materials is gone. It's now more modest. In fact, in some cases, there is even deflation where you had lumber prices have, are well off their high. They have deflated, but they're still high compared to where they were in 2019. So that's why I say yes and no; the era of rapid increases is behind us, but corrections are not complete to former prices and probably never will be in the market.

And depending upon the commodity, some have recovered better than other ones have. Lumber was a prominent exception because we actually closed mills. Canada and the US closed mills with the expectation that COVID would cramp housing. In fact, it was the reverse. So we had a real surge of demand even as we had supply constrained, so that we had a real whipsaw with lumber that didn't occur as badly with other materials, but, yeah, it should apply where it's still very expensive compared to what it was in 2019.

You know, it was funny I had a problem with landscaping around my own house. And so I went up to the local big hardware store and bought a six by six timber. I also needed to get a new circular saw. It was shocking to spend almost as much for the timber as for the saw, which tells you that the price correction on lumber has been somewhat there. Really, it's high.

Whereas, tools are electric saws are a commodity and those prices, they're higher, but they didn't have the same sticker shock as the lumber did.

Kristen: Yeah, wow, that definitely illustrates the point you were making that the correction hasn't been quite what one might think. So let's go back to that labor question. And we've talked on the podcast before about the need for skilled labor in construction and home improvement. Have there been any changes to that picture worth highlighting since we last spoke, Scott?

Scott: It's better. We had home improvement at a, just a torrid rate in 2022, into 2023.

And now that it's slacked off in 2023 and 2024, you aren't waiting months to get a contractor. But by the same token, they're still busy. They're not waiting for your phone call. And, and you're still going to wait. Yeah. And depending upon the specialty too, again, given this environment with, with roofing and siding and painting, that could be a longer wait than for a plumber, though, frankly, plumbers are pretty busy because of the IRA, the conversion to heat pumps requires plumbers, electricians.

There really is no trade that is in great supply right now. It's gone from a superheated atmosphere to really one of a hot market. Labor costs remain a constraint and availability of skilled labor is an issue. And yeah, the market's cooled off a bit, but skilled contractors take a lot of time to develop. There's apprenticeship programs in many of the trades.

And you can't just manufacture new tradesmen overnight, or even over a year; it takes two, three years. We're seeing some improvement in the supply of professionals and some cooling of the demand. So it's better balanced, but it's still a tight market for labor.

Kristen: Alright, so, Scott, let's talk about some of the indicators that businesses should be monitoring as they think about positioning themselves in the home improvement market. What should they be looking at? What should they be watching?

Scott: Certainly, as a company at S&P Global, we've been saying that a sort of condition for inflation to adjust has been for labor markets to adjust. For the past two years, I've been saying to watch those two numbers. As we've seen this year, for the most part, we've had unemployment trending up a little bit and inflation trending down slowly to the point where we think that the Federal Reserve will act.

So I think we pay a little bit less attention to those numbers, but still, to the degree that we have a change in administrations and changes in policies, you could see inflation come back or not, depending upon what happens.

At this point, I'm more interested in watching what happens with consumer confidence, consumer incomes, and then housing sales. Interest rates coming down is obviously a good thing for borrowers.

In the residential market, what's nice is you could have interest rates drop by 25 basis points, and you can refinance typically with little or no expense. Then when they come down again next year, you can do it again and again. Lowering rates at a gradual pace will feed through to home improvement relatively quickly because of the nature of residential financing, whereas on the corporate side, those tend to be lumpier loans that you don't refinance as quickly and cheaply, so they may wait a little bit longer to see rates drop by 50 to 75 basis points before they start to act.

Kristen: Scott, I could probably talk with you all day about home improvement and many other things, as we have done before, but it's time to wrap up our conversation<span/> on home improvement. Any final thoughts for our listeners?

Scott: The takeaway, I think, is that, if you follow this market, you've seen a challenging 2024 and our view, as a company, of the economy actually is relatively subdued in 2025 and 2026. So there is going to be downward pressure, I think on personal income in a lower GDP growth environment, but yet, those lower rates will help out on the home front. No pun intended.

And, yeah, I'm not forecasting double-digit growth for home improvement spending, but I think we're going to have conditions that will reverse this current low single-digit decline to more of a mid-single digit growth over the next couple of years.

Kristen: Thank you so much, Scott, for taking the time to share your insights with us. I hope you get a lot out of the summit in Chicago. And that wraps up this episode of The Decisive Podcast. Until next time.

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