Kitchen & Bath Design News

JAN 2018

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

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The kitchen and bath industry is expected to continue its strong upward trajectory, driven by a surging stock market, gains in home equity, and higher employment and wage growth. BY PATRICK O'TOOLE AND JANICE COSTA In a Sweet Spot he current three-year period – 2017, 2018 and 2019 – may be as good a time to be a kitchen and bath designer as any in recent memory. The strongest segment of a growing remodeling market is large discretionary improvements like kitchens and baths. Heading into 2017, many forecasters suggested a very strong 7% or 8% rate of growth for kitchen and bath activity. But the year just passed may have shown a much higher rate of growth, perhaps as high as 15% growth, says Todd Tomalak, an econo- mist with John Burns Real Estate Consulting. "Coming into 2017, we expected homeowner, big-project spending on remodeling to really outperform and specifically that growth be driven by higher-priced remodels," Tomalak notes. "That is the whole trade-up factor at work in remodel- ing spending. It is not so much in project-volume growth. We are really seeing more expensive remodel projects growing." As 2018 begins, nearly all indicators of current and future spending are pointing upward. Existing-home sales are predicted to tick up to 5.6 million, says Jessica Lautz of the National Association of Realtors. Meanwhile home prices and incomes are also rising. This, combined with a low, but im- proving mobility rate, means that conditions for discretionary improvements remain strong, says Kermit Baker, chief econ- omist for the American Institute of Architects and director of the Remodeling Futures Program at Harvard University. "There is a lot of good strength on the demand side," notes Baker. "Job growth is strong. Unemployment is low. Interest rates are still favorable. We are selling homes now, which gives homeowners a lot of opportunity to undertake home improve- ment projects. Across the board, you'd have to say that the tra- ditionally strong drivers of home improvement are uniformly moving in the right direction." But experts also cite several wild card factors that bear watching in the coming months and years. The lack of skilled labor is pervasive and is impacting the number of jobs that can be undertaken. Materials prices are ticking upward at a strong pace. And major changes to the tax code have upended a system where, for at least 80 years, housing was a top recipient of tax deductions, particularly interest on home equity lines of credit (HELOC). Home equity lines of credit have slowly come back and are driving a growing number of large projects, for now. In short, 2018 offers a host of opportunities for profession- als in the kitchen and bath industry. But it is clear, say experts, that the market is also at an inflection point – gradually shift- ing. Demographically, it is shifting away from baby boomers and toward millennials. It is a market moving from large, discretionary projects to more moderately priced projects over the longer term. And while the market is expected to grow in the aggregate until 2025, the trajectory will flatten, favoring kitchen and bath professionals who hew closely to the chang- ing needs of their clients in the coming years. CURRENT OPPORTUNITIES Robert Dietz, chief economist for the National Association of Home Builders, is among the experts who are bullish on kitchen/bath activity in 2018. His forecast calls for 7% growth in remodeling this year. The rationale for this outlook is clear – low inventory of houses for sale due to low mobility histori- cally means higher home values. "The primary characteristic of housing markets right now is a lack of inventory," Dietz notes. "That lack of inventory is due to a reduction in population mobility and a lack of new construction. So 'Econ 101' implies that, when you have a lack of inventory, you are going to have higher home-price gains. T '07 $284.9 $270.5 $233.1 $215.0 $247.1 $237.3 $240.3 $265.4 $282.4 $303.8 $349.2 $374.8 $373.5 $379.0 $400 $350 $300 $250 $200 $150 $100 $50 $0 Remodeling Spending, $Billions '08 '09 '10 '11 '12 '13 '14 '15 '16 Burns Residential Repair and Remodel Spending ■ Small Project Discretionary ■ Big Project Discretionary ■ Disaster Repairs Source: John Burns Real Estate Consulting, LLC; U.S. Census, CTBUH (Data: Nov-17, updated quarterly) The remodeling market reached new highs in 2017 and is expected to post gains through 2020. John Burns Real Estate Consulting expects repair and remodeling spending to grow 14.9% in 2017 and 7.3% in 2018. '17P '18P '19P '20P " Our growth for owner, big-project spending, including labor, is for 10.2% in 2018." TODD TOMALAK , economist, John Burns Real Estate Consulting " There is a lot of good strength on the demand side. Interest rates are still favorable." KERMIT BAKER , chief economist for the American Institute of Architects and director of the Remodeling Futures Program at Harvard University 68 Kitchen & Bath Design News • January 2018 2018 INDUSTRY FORECAST

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