Industry Research
Remodeling and Design Firms Are Optimistic for Third-Quarter 2019
The Q3 Houzz Renovation Barometer reveals that heavy rains, labor shortages and tariffs have challenged build-only firms
As we head into the second half of 2019, firms in the residential remodeling industry are indicating strong confidence in the market over the next three months, new data from Houzz reveal. However, near-record levels of rainfall this year, an ongoing construction labor shortage and the impact of U.S. tariffs on China have been challenging builders and dampening their expectations, with build-only firms most affected. Architects and interior designers also express strong confidence for the third quarter.
Construction Firms
1. Business activity expectations are strong but declining. Build-only remodelers, design-build remodelers and specialty trade contractors that work on upgrades to existing homes reported declining expectations for new projects, as well as inquiries from would-be clients about new projects, going into the second half of 2019. The Expected Business Activity Indicator (one component of the Barometer) for construction firms fell to 71, down 2 points from a year ago. Relative to the second quarter of 2019, the indicator is down 3 points.
The Expected Business Activity Indicator is based on survey questions that asked businesses to report whether they expect the number of project inquiries and new projects to increase, decrease or be unchanged in the coming three months compared with the prior three months. A score higher than 50 indicates that more firms reported increases than decreases. Therefore, this part of the Barometer indicates that at the start of the second half of the year, business expectations for construction firms remain strong but are softening.
1. Business activity expectations are strong but declining. Build-only remodelers, design-build remodelers and specialty trade contractors that work on upgrades to existing homes reported declining expectations for new projects, as well as inquiries from would-be clients about new projects, going into the second half of 2019. The Expected Business Activity Indicator (one component of the Barometer) for construction firms fell to 71, down 2 points from a year ago. Relative to the second quarter of 2019, the indicator is down 3 points.
The Expected Business Activity Indicator is based on survey questions that asked businesses to report whether they expect the number of project inquiries and new projects to increase, decrease or be unchanged in the coming three months compared with the prior three months. A score higher than 50 indicates that more firms reported increases than decreases. Therefore, this part of the Barometer indicates that at the start of the second half of the year, business expectations for construction firms remain strong but are softening.
2. Project wait times have dropped nationally. Construction businesses focused on remodeling reported that wait times before they can take on a midsize project from a new client are now more than 2 weeks shorter than a year ago. The average national wait time was 6.5 weeks a year ago and is now 4.3 weeks, meaning the average wait time has dropped by 2.2 weeks.
Compared with the start of the second quarter of 2019, projected wait times at the start of the third quarter of 2019 decreased by 0.7 week, from 5 weeks, according to the Barometer’s Backlog Indicator for this group. This is the lowest level in two years for project backlogs, “implying that households are reluctant to start construction this late in the year,” Sitchinava says.
Compared with the start of the second quarter of 2019, projected wait times at the start of the third quarter of 2019 decreased by 0.7 week, from 5 weeks, according to the Barometer’s Backlog Indicator for this group. This is the lowest level in two years for project backlogs, “implying that households are reluctant to start construction this late in the year,” Sitchinava says.
Among the construction firms, design-build remodelers have the longest average wait time before they can take on a midsize project: 5.2 weeks, down from 6 weeks at the start of the prior three months. Wait times for build-only remodelers are 4.6 weeks, down from 7 weeks at the start of the previous three months. Specialty trade contractors, such as those who do masonry, painting or electrical work, have the shortest project wait times, at 3.8 weeks, and saw no change to their wait times.
Of course, backlogs vary significantly by region, as this map shows. The East South Central region of the U.S. (Alabama, Kentucky, Mississippi, Tennessee) has the shortest average wait times (3 weeks), while the Middle Atlantic region (New Jersey, New York, Pennsylvania) has the longest (5.2 weeks).
Of course, backlogs vary significantly by region, as this map shows. The East South Central region of the U.S. (Alabama, Kentucky, Mississippi, Tennessee) has the shortest average wait times (3 weeks), while the Middle Atlantic region (New Jersey, New York, Pennsylvania) has the longest (5.2 weeks).
3. Recent business activity decreased year over year. A drop in new-project inquiries and new committed projects in April, May and June pushed the Recent Business Activity component of the Barometer to 64 for construction firms, down 1 point from the same period a year earlier. Relative to the prior three months, the indicator is down 3 points. The Recent Business Activity component looks at actual activity over the past three months.
The overall decline for this indicator in Q2 compared with Q1 was driven by what is happening in the market for build-only remodelers. Their score dropped a whopping 17 points from the previous quarter, to 47. “Weather was the leading concern among construction businesses in the second quarter, which is understandable, since it was the wettest quarter in the U.S. since 1957,” Sitchinava says.
The weather and other challenges seemed to disproportionately hit build-only remodelers compared with the other pro types in the construction sector. In contrast with the dramatic drop for build-only firms, the decline in recent business activity for design-build remodelers was mild, down 1 point to 68. And for specialty trade contractors, recent business activity actually rose, 3 points to 69.
The construction sector also reported being challenged by the ongoing tariffs with China: 1 in 3 businesses surveyed reported negative effects from the tariffs, while a similar share among construction and a greater share among the design sector reported neutral impacts. Tariffs affect some of the materials used in remodeling. “In September 2018, the U.S. imposed a 10 percent increase in tariffs on $200 billion of imports of countertops, cabinets, flooring and other materials from China that are commonly used in the remodels of kitchens and bathrooms,” Sitchinava says. “In May of this year, this 10 percent tariff was raised to 25 percent. The impact of these tariffs on the building industry has been quite immediate, with government indices showing a meaningful increase in material prices.”
In contrast with the Expected Business Activity and Project Backlog indicators, which look forward in time, the Recent Business Activity Indicator looks back in time. It is based on survey questions that ask businesses to report whether they observed the actual number of project inquiries and new projects increasing, decreasing or staying the same in the past three months relative to the prior three months.
The overall decline for this indicator in Q2 compared with Q1 was driven by what is happening in the market for build-only remodelers. Their score dropped a whopping 17 points from the previous quarter, to 47. “Weather was the leading concern among construction businesses in the second quarter, which is understandable, since it was the wettest quarter in the U.S. since 1957,” Sitchinava says.
The weather and other challenges seemed to disproportionately hit build-only remodelers compared with the other pro types in the construction sector. In contrast with the dramatic drop for build-only firms, the decline in recent business activity for design-build remodelers was mild, down 1 point to 68. And for specialty trade contractors, recent business activity actually rose, 3 points to 69.
The construction sector also reported being challenged by the ongoing tariffs with China: 1 in 3 businesses surveyed reported negative effects from the tariffs, while a similar share among construction and a greater share among the design sector reported neutral impacts. Tariffs affect some of the materials used in remodeling. “In September 2018, the U.S. imposed a 10 percent increase in tariffs on $200 billion of imports of countertops, cabinets, flooring and other materials from China that are commonly used in the remodels of kitchens and bathrooms,” Sitchinava says. “In May of this year, this 10 percent tariff was raised to 25 percent. The impact of these tariffs on the building industry has been quite immediate, with government indices showing a meaningful increase in material prices.”
In contrast with the Expected Business Activity and Project Backlog indicators, which look forward in time, the Recent Business Activity Indicator looks back in time. It is based on survey questions that ask businesses to report whether they observed the actual number of project inquiries and new projects increasing, decreasing or staying the same in the past three months relative to the prior three months.
Architectural and Design Services Firms
1. Firms expect positive business activity. In contrast with construction firms, architects and interior designers reported rising expectations for new business activity during the second half of 2019. Their score of 71 for the Expected Business Activity Indicator shows that there are more firms that anticipate increases than those that anticipate decreases. This score is up 2 points from the same period a year ago and up 1 point from the start of the second quarter of 2019.
1. Firms expect positive business activity. In contrast with construction firms, architects and interior designers reported rising expectations for new business activity during the second half of 2019. Their score of 71 for the Expected Business Activity Indicator shows that there are more firms that anticipate increases than those that anticipate decreases. This score is up 2 points from the same period a year ago and up 1 point from the start of the second quarter of 2019.
2. Wait times are steady nationally. The Backlog Indicator for architectural and design firms stayed at an average of 4.7 weeks nationally at the start of the second half of the year, a drop of 0.9 week from the same period in 2018. Overall, wait times have remained flat for architectural and design services firms during 2019.
Taking a closer look by professional type, architects currently have longer wait times to take on a new midsize project (5.2 weeks, up 0.8 week relative to the start of the prior three months) compared with interior designers (3.9 weeks, down 1.3 weeks relative to the start of the prior three months).
Taking a closer look by professional type, architects currently have longer wait times to take on a new midsize project (5.2 weeks, up 0.8 week relative to the start of the prior three months) compared with interior designers (3.9 weeks, down 1.3 weeks relative to the start of the prior three months).
Of course, backlogs vary significantly by region, as this map shows. The West North Central region of the U.S. (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota) has the shortest average wait time (4 weeks), while the Mountain region (Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah, Wyoming) and Middle Atlantic region (New Jersey, New York, Pennsylvania) have the longest (5.3 weeks).
3. Recent business activity is up year over year. Overall, the score related to recent project inquiries and new committed projects in April, May and June rose to 63, a 6-point increase from a year earlier. Relative to the prior three months, this indicator remained flat with the first quarter of 2019.
Taking a closer look by professional type, architects’ score for recent business activity declined to 61 (down 3 points compared with the prior three months), while interior designers saw their score increase to 65 (up 4 points compared with the prior three months).
The Houzz Renovation Barometer is based on a quarterly online survey sent to a national panel of U.S. businesses with profiles on Houzz. The Barometer includes three components: expected business activity, recent activity and backlogs (or wait times). Expectations and business activity data are smoothed out to allow for predictable seasonal fluctuations, while wait-time data are not.
The 2019 Q3 Houzz Renovation Barometer garnered responses from 2,622 firms and was fielded from June 27, 2019, through July 10, 2019.
If you would like to offer your insights on market conditions in your area by joining the Barometer panel, please click here.
Read more Barometer reports
Tell us: How does this report compare with your firm’s experience? Please share in the Comments.
Taking a closer look by professional type, architects’ score for recent business activity declined to 61 (down 3 points compared with the prior three months), while interior designers saw their score increase to 65 (up 4 points compared with the prior three months).
The Houzz Renovation Barometer is based on a quarterly online survey sent to a national panel of U.S. businesses with profiles on Houzz. The Barometer includes three components: expected business activity, recent activity and backlogs (or wait times). Expectations and business activity data are smoothed out to allow for predictable seasonal fluctuations, while wait-time data are not.
The 2019 Q3 Houzz Renovation Barometer garnered responses from 2,622 firms and was fielded from June 27, 2019, through July 10, 2019.
If you would like to offer your insights on market conditions in your area by joining the Barometer panel, please click here.
Read more Barometer reports
Tell us: How does this report compare with your firm’s experience? Please share in the Comments.
“The third-quarter outlook of the architecture and design sector is the most optimistic of the past two years,” says Nino Sitchinava, Houzz principal economist. “However, the construction sector sentiments are some of the lowest we’ve seen since 2015, although still high in absolute terms.”
Read on for a current picture of the remodeling industry based on insights from firms active in the industry now. We’ll start with construction firms and then move on to firms in the architectural and design services areas. First we’ll look at what these firms expect for the next three months, then at their project wait times, and finally at their business activity over the last three months.