Kitchen & Bath Design News

JAN 2019

Kitchen & Bath Design News is the industry's leading business, design and product resource for the kitchen and bath trade.

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growth rate is likely to experience slower growth beyond, but it will still be growing despite a number of economic, housing and demographic cross-currents. THE 'R' WORD Very few industry participants today want to discuss the possibility of an economic recession, but after a decade of eco- nomic expansion dating back to 2009, the bottom of the Great Recession, the gravitational pull of the business cycle means that a slow-down is coming and it's only a matter of time. A recession is defined as three consecutive quarters of negative growth in the overall economy. Dietz says the risk of a recession is very low for 2019. Rather, he says, the econo- my should grow at 2.5 percent in 2019. It will then slow to 1.3 percent in 2020. "It's going to feel like a recession. Even though the economy will still be growing, it will be noticeably slowing," says Dietz. Tomalak and Baker say they are less inclined to see any economic growth in 2020. And Tomalak and the team at John Burns Real Estate Consulting now peg the risk of a declared recession in 2020 at better than 50 percent. "The music is slowing down a little bit now. We are not going to see a lot more growth this cycle until we have the next recovery underway," Baker explains. "So, I think there's a nervousness and certainly that is triggered by this volatility that we are seeing in the stock market." Indeed, stock market growth in 2017 and early 2018 con- tributed to a buoyancy in high-end remodeling activity. But by the end of 2018, many of those gains had been erased. In addition, the growth in home prices seemed to be topping out in some places. According to realtor data, the level of reported "price cuts" to high-end, for-sale homes is rising. Yes, there is equity, but the outlook for residential real estate to grow further is softening. Reduced housing affordability is a big-picture issue that factors prominently into the outlook for remodeling activity over the next few years, notes Dietz. Last fall, the U.S. cen- tral bank, the Federal Reserve, began the process of raising interest rates amid signs of overheating in the economy. Those rising rates have negatively impacted mortgage-interest rates, which are expected to soon exceed 5 percent, up from 3 percent a few years ago. With home prices rising generally, higher rates make buying a new or existing home even less affordable. "We have a real housing affordability crisis on our hands currently," says Dietz. "Only 56 percent of new and exist- ing-home sales are affordable for a typical family, and if trends hold, we will fall below 50 percent affordable." The main rea- son for the trend, he explains, is that incomes have not risen fast enough to keep pace with rising home prices and now rising rates. More housing starts are coming, and it makes sense that those will primarily be in entry-level, single-family homes and townhouses. These price points are consistent with Tomalak's remodeling forecast favoring low- to mid-range kitchen and bath activity and pivoting away from larger high- end projects at the end of 2019 and into 2020 and beyond. Higher rates and higher home prices have created a "lock- in" effect says Baker, which has slowed mobility. People are living in their homes much longer and are investing in repairs and some updates to those homes. "The one piece that we care about with respect to kitch- en and bath activity is that you have this lock-in effect that's happening, where it makes even more sense to remodel your existing home than to move," Tomalak explains. "History tells us that when this happens, there will be a greater number of projects, but at a lower price point." Burns: Mix Shift to Smaller-Scale Projects Kitchen and bath design activity has grown at an 8 percent rate for the past two years. JBRC is forecasting more growth ahead, but at lower rates in the coming years. A major factor in the slower growth rate is a reduction in the average project size, as shown in the chart above. Source: John Burns Real Estate Consulting, LLC " Only 56 percent of new and existing-home sales are affordable for a typical family, and if trends hold, we will fall below 50 percent affordable." Robert Dietz, National Association of Home Builders Forecast for 2018–2021 CAGR Bathroom Remodel Projects 2016-2018 +8% CAGR +7% Growth +2% CAGR R E M A I N D E R O F C Y C L E 2019 2020-2021 < $15K +6% 1.2% Total Bathroom Remodels Low-Mid Price Bathroom Remodels +2% +2% +1.5% +2% +2.1% -0.5% -1.7% -0.1% +2.1% +3% +1.6% +1.9% January 2019 • 39 Number of Remodeling Projects Fit and Finish per Remodel (Mix Shift) Labor Impact Material Cost Inflation

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