Contractor Update

Here's an interesting article from Philly.com: "The housing slowdown and mortgage crisis have finally begun cutting into the remodeling market."

"Remodeling activity slowed slightly in the second quarter, according to the National Association of Home Builders' Remodeling Market Index, which measures remodelers' perception of current demand and future activity. An index of 50 or above indicates that most remodelers view market conditions as improving."

"In the Northeastern United States, the home-builders association reported, things were a bit better in April, May and June, with the remodeling index climbing to 49.5 from 43.4 in the first quarter."

"'While we have experienced some weakening in the remodeling market, activity has remained relatively steady,' said Mike Nagel, NAHB Remodelers chairman. 'We may have seen a decline in the number of major remodeling projects, however, the market has been buoyed by an increase in the number of homeowners requesting smaller-scale projects and home alterations.'"

"These days, with interest rates rising and credit tightening, fewer homeowners are tapping into equity. According to Freddie Mac, the amount of home equity cashed out through refinancing in the second quarter totaled $76.7 billion, a drop of $24.5 billion compared with the same quarter last year."

"'Both the tightening of underwriting standards and slackening house-price appreciation are possible contributing factors to the decline,' said Frank Nothaft, Freddie Mac's chief economist."

"Fixed 30-year interest rates are hovering around 6.60 percent. While that's just a few basis points higher than in August 2006, it's more that 1.5 percentage points above the rates available during the refinancing frenzy of 2001-2005."

"But there is another, more troubling issue here: American families cashed out $1.2 trillion of home equity between 2001 and 2006, which could leave them financially ill-prepared for the future, said Tim Rusch of the nonprofit public-policy organization Demos."

"'The impact of this trend is manifold: Families no longer have an asset to turn to in times of emergency, or to cover education, or for support in retirement - a foreboding shift in household security as millions of baby boomers near retirement age,' he said."

"More families are being pushed to the edge of bankruptcy as their APRs (annual percentage rates) reset and they are unable to make payments on their homes or keep up with other bills, Rusch said. And in locations where the market is flooded with vacant foreclosure properties and sale prices are dropping, many who refinanced can actually find themselves "upside down" in a home."

"'In other words, they have borrowed the entire value and owe more on it than it is actually worth,' he said."

"Not surprisingly, the remodeling market is following the downswing in the overall housing market, said the home-builders association's chief economist, David Seiders. 'We expect some further erosion in the second half of this year and in 2008, followed by a gradual recovery in 2009 and beyond.'"

Woodbury remodeler Jay Cipriani began 2007 with "an aggressive goal" of surpassing the $6.5 million his company made last year by $1 million.

"We had a meeting early [August] to tail back this year's budget to $6.8 million. It's a more cautious market," said Cipriani, whose firm does about 100 large and small jobs every year.

Though remodelers are feeling the pinch, home centers appear to be as full of shoppers as ever. Yet representatives for those store chains were unwilling to comment for this article.

"We are in a quiet period in advance of earnings release . . . so I am not able to talk about sales trends (including shopping habits)," Chris Ahearn, vice president of public relations for Lowe's, said earlier this month.

Thus far, the downturn in the housing market hasn't hurt the profit margins of major appliance manufacturers. Whirlpool, GE and LG Electronics all reported record sales and profits in the second quarter.

But Whirlpool's bottom line benefited from stronger sales abroad. In North America, the company's reported sales were down 6 percent, to $3 billion, because of lower appliance shipments and softer demand.

Though industry-wide shipments of washers and other major appliances fell 1 percent in North America in the second quarter and 5 percent in the first half of 2007, Whirlpool noted that shipments in the region began to improve in the period, after months of declines. The company still expects U.S. industry shipments to fall 2 percent to 3 percent this year.

Figures from GE and LG included divisions other than appliances, as well as global sales.

From a remodeling-to-sell point of view, owners' attitudes toward having work done before their houses go on the market have changed. Mike McCann, a Prudential Fox & Roach associate broker in Center City, said even sellers planning to list their houses six months to two years down the road are asking his advice.

"It's definitely a change from a couple of years ago, when you couldn't convince them to do anything," said McCann. He mentioned refinishing or installing new flooring, updating appliances, and painting as three upgrades he's seeing a lot of currently.

"We're not seeing people refinishing basements or putting in kitchens and bathrooms, which is something that a seller shouldn't do in any real estate climate," McCann said. "It's cosmetics, pure and simple."

So, with sellers making cautious improvements before they list their houses and anecdotal evidence from the home centers indicating that more homeowners are doing their own work, where does this leave the remodeler?

"It is a more difficult market," said Cipriani. "Our clients are still spending $50,000 on a bathroom or a kitchen, but most are not willing to spend a couple of hundred thousand on an addition."

On at least three occasions recently, Cipriani said, his estimators have reported that "customers have been delaying the start of jobs because they are looking for money."

He has a sense, he said, that lenders are tightening underwriting standards for refinancing and personal loans, and that the easy money that was around even nine months ago just isn't there anymore.

"Right now, we're hoping for the same amount of business as last year, or a little bettter," Cipriani said. "We just can't be as aggressive in our estimates as we were at the beginning of the year."

Labels: Construction News

Contractors and service pros are good at what they do - building, renovating, installing and repairing. Unfortunately, owning a business means you also must be good at business. At Construction Deal.com, our goal is to help your company succeed. So we wanted to help those who might need help with the accounting side of owning a business. This might be remedial for some business owners, but we'll move on to more complicated topics that might provide you with a few tips and tricks.

First, it's very important to keep track of everything that happens with your business. These are called transactions. If you purchase tools, deposit a check, have a truck repaired, pay subs, or pay insurance, you'll need to hold on to receipts and enter the details and amounts in a ledger or computer program. Even if the transaction doesn't include money changing hands -- write it down. For example, if you receive a bill for lumber or you've just sent your bill to a customer and money won't exchange hands until next month.

All these transactions have accounting terms and it's how you can keep track of how well your business is doing. It's a great way to ensure your company will be around for years to come. These terms include income (deposits), assets (tool purchases), liabilities (insurance payments), accounts payable (lumber invoice), accounts receivable (a customer invoice), and more. We'll bring these terms up often as we continue through the process.

Next, it is important to consider your accounting cycle. This refers to the period of time you'll be keeping track of expenses and income. It could be a year, a month, a quarter. You could do it by year, but I recommend not waiting until the end of the year to pull out a big box of receipts. Doing it little by little will prevent those end-of-the-year headaches. Your year doesn't have to be January to December either. It can be from "busy season" to "busy season." Or April to April (tax time.) But whatever cycle you choose, stick with it.

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Labels: Accounting

At ConstructionDeal.com, we want to keep our contractors up to date on all the latest news and information that affects their companies. Here are a few excerpts of late-breaking stories on the slowing housing market:

From Reuters :"U.S. house prices may fall further as credit availability tightens, according to a new study from the Cleveland Federal Reserve."

"'House prices may still fall in the future,' wrote the researchers. 'Any change in the ability to purchase a home, such as from innovations in the lending environment, can have a large impact on the level and volatility of housing prices.'"

"The study went on to forecast that the boom-bust cycle of lending could crimp the ability of households with a weaker credit profile to borrow."

From CNN Money: "Home Depot's CEO Frank Blake said Wednesday that the softness in the housing market and the subprime mortgage squeeze will probably carry through much of 2008."

"'In the beginning of this year, we had hoped to see the start of some bottoming in the housing market in the back-half of 2007. We don't think this will happen,' Blake told an analysts gathering."

"He added that 2007 'will continue to be a tough year.' More importantly, he said 'much of 2008 will face into the same headwinds.'"

"'There's a lot of speculative activity in the markets. And the subprime issue is putting additional pressure on consumers. We will see this play out over the next few quarters,' Blake said. On a regional basis, Blake said Florida and California were two markets that had suffered the most dramatic slowdown in terms of Home Depot’s business."

From the Daily Herald: "Because home sales and moves stimulate purchases of appliances, electronics and furniture, the giant chains that catered to house flippers and renovators have reported recession like results."

"Americans who were living high by taking out home-equity loans during the boom have watched their equity drop and are now faint of heart when it comes to big-ticket discretionary purchases. The nation's biggest retailing sector - automobiles - is likewise feeling the effects."

"John Crane, general sales manager at Ron Smith Buick Pontiac GMC Jeep in Merced, Calif., has seen a tremendous slowdown in the past six to eight months. 'People don't have the money to look at cars,' he says. 'They're having a hard time paying house payments. Now their second mortgages and 1 percent loans are coming up.'"

Labels: Construction News

An unexpected new twist could seriously affect the remodeling, building, and home repair industry. As homebuilders finish off current projects, new home construction will continue to plummet as the glut of existing properties will take time to evaporate. And, as home prices drop over the course of this year and next, available home equity will also dry up. With less equity, homeowners will not be as willing to spend on renovation projects. Another expected trend has been workers and companies transitioning out of new home construction and into remodeling and home repair.

All of those factors were predicted and are coming true. However, the unexpected new twist is what really has economists worried. Over the course of the past two months, the credit industry has severely tightened their lending policies. Because of all the sub-prime loans that have and will continue to go bad, lending institutions have become afraid to approve new loans. Zero-down mortgage products have disappeared. Even people with good credit and down payments can't get a home loan. Their fear goes beyond mortgages, too. People with great credit scores and equity in their homes are being turned down for renovation loans. Others may be able to get a loan but the interest rates are so high that many are walking away.

With credit becoming more and more unavailable, it will continue to drag down the overall housing market. Not only are potential buyers waiting for prices to come down out now they may not even be eligible to get an affordable mortgage when prices do drop. This can only hurt the overall economy. Experts are suggesting the Federal Reserve may drop rates again at their next session in September, but it may be too little too late. If the housing market continues to affect jobs outside of real estate and lending, it could mean a very long and very tough 2008. A recession could be just around the corner.

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MORE CONSTRUCTION AND ECONOMIC NEWS:
From the AP: "WASHINGTON -- Construction activity plunged in July by the biggest amount in six months as spending on homes fell for a record 17th straight month."

"The Commerce Department reported Tuesday that construction spending dropped 0.4 percent in July, compared with June, the weakest showing since a 0.6 percent fall in January."

From Bloomberg: "Homebuilders are scaling back to try to trim the glut of unsold residential properties even as companies are still adding offices and factories. The downturn may steepen as lenders make it tougher and more expensive to get financing following the sell-off in credit markets in August."

Also from Bloomberg: "So far, the Fed has refrained from reducing its benchmark interest rate, using other tools to ease tightening credit conditions."

"Federal Reserve Chairman Bernanke and his team lowered the discount rate, for direct loans to banks, by half a percentage point on Aug. 17. The main target rate remains at 5.25 percent."

"Officials acknowledged in their statement that risks to economic growth had 'increased appreciably.'' They next meet Sept. 18, where investors anticipate they will lower rates at least a quarter point."

"The Fed chief said earlier in his opening speech to the conference that the Fed 'will act as needed' should a sustained tightening in credit threaten the economy."

Labels: Construction Industry, Construction News, Construction Trends, Small Business Advice