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Buyers will Bear the Brunt of Rising Homebuilding Costs in 2018

Buyers will Bear the Brunt of Rising Homebuilding Costs in 2018

A new report from home remodeling and design company Houzz finds that homebuilders are struggling with lower labor availability and rising costs of products and materials

Houzz today released its 2018 State of the Industry report, which reviews the 2017 performance for seven residential renovation and design business categories, including architects, homebuilders and interior designers and provides predictions for the year ahead.

The majority of professionals (71 percent to 88 percent) surveyed expect to have a “good” year, but construction-focused and outdoor industry groups were the most optimistic with 36 percent to 44 percent of respondents saying they expect to have a “very good” year.

Although confidence is high, respondents reported concerns about reduced labor availability, increases in the cost of products and materials and the direction of the national economy.

“The residential renovation and design industry continues to build on the robust growth of the past four years. Average revenue growth rates hovered around 10 percent annually, with performance exceeding expectations for most firms, and at least one-fifth of businesses hiring more workers each year,” said Houzz principal economist Nino Sitchinava in a press release.

“With market fundamentals aligned in favor of the home improvement industry, 2018 is set to be another great year,” she added. “That said, businesses are cautious about tightening local labor markets that may hamper growth in many regions and apparent economic uncertainty on a national level.”

Buyers and owners, be prepared to pay more
Half of general contractors, remodelers and homebuilders surveyed said they expect 2018 to be a “good” year and another 36 percent said they’re on track to have a “very good” year — two pieces of welcome news for a real estate market starving for new inventory.

This group of professionals is forecasting a growth rate of 10.5 percent, and more than three-fourths of respondents said they expect increases in revenue (79 percent) and profit growth (72 percent).

Despite having a robust level of confidence, respondents recognized there are some roadblocks that could prevent their predictions from coming to fruition. Out of the seven residential renovation and design business categories included in the report, general contractors, remodelers and homebuilders were most likely to say they expect labor availability (53 percent) and labor costs (56 percent) to worsen over the upcoming year.

So, where is all this positive sentiment coming from?

Sitchinava said general contractors, remodelers and homebuilders are depending on booming demand for each of their services to bolster sales despite decreasing labor availability and rising costs.

When it comes to general contractors and remodelers, the majority of their business in 2018 is expected to come from baby boomers preparing for retirement. They’re also expected to get business from buyers looking to fix up a recent purchase.

“The three pillars of our industry today are the spending capacity of baby boomers preparing their homes for retirement, aging homes in need of repair and largely recovered home equity across most parts of the country,” she said in an emailed statement.

“These demand-side factors are the “perfect storm” propelling the industry forward. That said, tight labor conditions and rising costs are some of the challenges that pros have to overcome, in otherwise boom years.”

Sitchinava said real estate agents should inform buyers, who are increasingly becoming more open to fixer-uppers, about the regulations and costs associated with remodeling a home. As a rule of thumb, she said, buyers should set aside a contingency amount of at least 20 percent for budget and cost overruns.

“It is important to note that today’s market for home renovations is very heated, and finding a contractor with availability is a significant undertaking,” Sitchinava noted. “Realtors can use this information to set customer expectations about feasibility and timing of home renovations.”

As inventory continues to be below historical averages, homebuilders have no shortage of demand. But slower completion timelines due to the lack of labor and the high cost of production will result in higher home prices.

“Ultimately, the costs incurred by the businesses associated with tight labor markets are passed on to consumers,” Sitchinava said. “In other words, if builders are experiencing longer completion timelines, a less reliable labor pool and rising pressure to increase labor wages, these increases in costs of doing business should be mostly, or in part, reflected in home price increases.”

About the study
The Houzz U.S. State of the Industry was conducted among home renovation firms in the Houzz U.S. community that offer services related primarily to residential renovation and/or design. Companies were grouped into seven industry sectors including, architects, interior designers, general contractors and remodelers, design-build firms, building and renovation specialty firms, landscape and outdoor specialty firms, and decorating specialty firms. The study was fielded in December 2017 and January 2018.

BY: Marian McPherson | Staff Writer Inman | May 8, 2018