Remodelers’ Average Net Profits are Down, NAHB Study Shows

2023-03-06T09:15:36-06:00

Residential remodeling companies, just like any other private enterprise in a capitalist economy, exist to satisfy the demand of consumers for specific products or services in exchange for a rate of profit commensurate with the risk taken.  Companies control when they enter or exit the industry, but their financial performance is intrinsically linked to external factors, such as the number and size of their competitors, ease and availability of credit and inputs, or the bargaining power of their customers and suppliers.  Given this reality, companies must regularly evaluate their financial performance vis-à-vis the industry as a whole in order to improve processes, set individual and collective goals, and ultimately remain successful businesses. For this reason, the National Association of Home Builders periodically conducts the Remodelers’ Cost of Doing Business Study – a nationwide survey of residential remodeling companies designed to produce profitability benchmarks for that segment of the construction industry.  The latest study collected information for fiscal year 2021 and compares findings to fiscal years 2015 and 2018. The 2023 edition of the study shows remodelers’ gross and net profit margins both dropping between 2018 and 2021.  On average, they reported $1.9 million in revenue for fiscal year 2021, of which $1.4 million (75.1%) was spent on cost of sales (e.g., labor, material, and trade contractor costs as well as direct costs for single-family construction) and another $389,000 (20.3%) on operating expenses (e.g., general and administrative, finance, and S&M expenses, owner’s compensation).  As a result, remodelers’ average gross profit margin for 2021 was 24.9%, with a net margin before taxes of 4.7% (Fig. 1). Figure 2 puts these margins in historical context.  Remodelers’ average gross profit margin grew steadily from 2011 (26.8%) through 2018 (30.1%) before dropping in 2021 (24.9%).  The decline was driven by significant increases in the share of revenue spent on two cost lines:  trade contractors’ costs, which rose from 29% in 2018 to 36% in 2021, and direct costs for single-family homebuilding, which went from 3% to 9%[1].  In the end, remodelers averaged a net profit margin before taxes of 4.7% in 2021, only slightly lower than in 2018 (5.2%).  Notably, a significant reduction in operating expenses between 2018 and 2021 (from 25% to 20%) prevented deeper net losses. In terms of the balance sheet, residential remodelers reported an average of $497,000 in total assets for fiscal year 2021.  Of that, $242,000 (49%) was owed as either current or long-term liabilities, and the remaining $255,000 (51%) was owned free and clear by the remodelers (Fig. 3). Figure 4 shows that remodelers’ average total assets increased significantly between 2011 and 2015 (up 54% to $414,000) but were essentially flat between 2015 and 2018 (up 2% to $421,000). By 2021, however, remodelers managed to strengthen their balance sheets again, with assets rising 18% to $497,000. Looking at liabilities as a share of assets over the last 10 years shows that remodelers have deleveraged significantly.  In 2011 and 2015, at least 65% of their assets were backed up by debt.  By 2018, that share had dropped to 52%; and by 2021, it was 49%.  Meanwhile, the share of assets financed through equity went from roughly one-third in 2011 and 2015, to almost half (48%) in 2015, and to more than half (51%) in 2021.  This is the first time in this series that remodelers have run their businesses relying more on their own capital than on liabilities. [1] Residential remodelers were significantly more likely to be involved in single-family home building in 2021 than in 2018.  In fact, in 2018, only about 6% of their total revenue was derived from single-family construction. In 2021, the share was 11.0%. Related ‹ Use of Residential Energy Tax Credits IncreasesTags: housing economics, remodeling

Remodelers’ Average Net Profits are Down, NAHB Study Shows2023-03-06T09:15:36-06:00

Unaffordable Prices Are Back on Top as Most Common Reason Buyers Can’t Make Purchase

2023-02-01T09:16:49-06:00

By Rose Quint on February 1, 2023 • An earlier post revealed that 65% of buyers who were actively engaged in the process of finding a home in the fourth quarter of 2022 have spent 3+ months searching for a home without success. The inability to find an affordable home (45%) is the most common reason buyers looking for 3+ months can’t make a purchase.  In second place follow the inability to find a home in a desirable neighborhood and getting outbid by other buyers (tied at 30%). When asked what they are most likely to do next if still unable to find a home in the next few months, 46% of active buyers searching for 3+ months said they will continue looking for the ‘right’ home in the same location (down from 50% a quarter earlier); 38% will expand their search area (up from 35%), 23% will accept a smaller/older home (down from 33%), and 16% will buy a more expensive home (down from 28%). Meanwhile, the share who plan to give up their home search until next year or later fell to 21%, down from 28% in the third quarter. This is the first time the share has declined in six quarters. **Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here.  This is the final in a series of six posts highlighting results for the 1st quarter of 2022. Related ‹ Fourth Quarter of 2022 Homeownership Rate at 65.9%Tags: housing economics, housing trends report

Unaffordable Prices Are Back on Top as Most Common Reason Buyers Can’t Make Purchase2023-02-01T09:16:49-06:00

Fewer Prospective Buyers Are Fully Engaged in Purchase Process

2023-01-31T09:21:23-06:00

By Rose Quint on January 31, 2023 • Dwindling housing affordability in the fourth quarter of 2022 caused the share of prospective home buyers who are actively engaged in the purchase process (i.e. who have moved beyond just the planning phase) to drop to 46%, down from 59% a quarter earlier. The share of prospective buyers fully engaged in the buying process declined in every region between the third and fourth quarters of 2022: Northeast (62% to 50%), Midwest (53% to 42%), South (51% to 47%), and West (68% to 44%). After reaching a record high of 70% in the third quarter of 2022, the share of active buyers who have spent 3+ months searching for a home to buy eased a bit in the fourth quarter, down to 65%.  As demand has weakened, competition is letting up slightly for those still willing and able to buy a home. * Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here. This is the fifth in a series of six posts highlighting results for the 4th quarter of 2022.  Related ‹ Housing Affordability Goes SouthTags: housing economics, housing trends report

Fewer Prospective Buyers Are Fully Engaged in Purchase Process2023-01-31T09:21:23-06:00

Housing Affordability Goes South

2023-01-30T09:18:23-06:00

By Rose Quint on January 30, 2023 • Buyers’ outlook for housing affordability took a sharp negative turn in the final quarter of 2022, when a record high of 87% reported being able to afford fewer than 50% of the homes for-sale in their markets.  The remaining 13% can afford the majority of homes available, less than half the 31% who could in the third quarter. Affordability expectations between the third and fourth quarters of 2022 worsened in all regions.  The share of buyers able to afford less than half the homes available in their markets rose in the Northeast, from 66% to 89%; in the Midwest, from 83% to 84%; in the South, from 77% to 83%, and in the West, from 58% to 87%. * Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here. This is the fourth in a series of six posts highlighting results for the 4th quarter of 2022.   Related ‹ How Pandemic Changed Living Arrangements of Young AdultsTags: housing affordability, housing economics, housing trends report

Housing Affordability Goes South2023-01-30T09:18:23-06:00

Buyers Expect Less Housing Availability

2023-01-27T09:16:26-06:00

By Rose Quint on January 27, 2023 • After a brief respite earlier in 2022, buyers’ expectations of housing availability soured again at the end of the year.  In the final quarter of 2022, the share of buyers who expect the home search to get easier in the months ahead dropped to 24%, down from 37% in the third quarter. In contrast, 66% expect the search to get harder/stay the same, up from 59%. Housing availability expectations deteriorated in three regions of the country.  In the Northeast, the share of buyers expecting an easier home search in the months ahead dropped from 44% in the third quarter to 28% in the fourth quarter.  In the Midwest, the share dropped from 33% to 19%; and in the West, from 52% to 27%.  The share edged up in the South, from 23% to 24%. Another way to measure buyers’ perceptions of housing inventory is to ask them if they are seeing more/fewer/the same number of homes for-sale (with desired features and price point) in their markets.  By this measure, buyers’ perceptions also worsened.  In the final quarter of 2022, 30% of buyers were seeing more such homes available, down from 36% a quarter earlier. Inventory perceptions weakened across all regions.  From the third to the final quarter of 2022, the share of buyers seeing more homes (with desired features and price point) on the market fell in the Northeast (43% to 26%), Midwest (30% to 23%), the South (33% to 32%), and West (42% to 31%). * Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here. This is the third in a series of six posts highlighting results for the 4th quarter of 2022.  See previous post on plans to buy and new vs. existing preferences. Related ‹ New Home Sales Uptick in December But Market Weakness RemainsTags: housing availability, housing economics, housing trends report

Buyers Expect Less Housing Availability2023-01-27T09:16:26-06:00

Popularity of New Homes Declines in Final Quarter of 2022

2023-01-25T09:14:25-06:00

By Rose Quint on January 25, 2023 • Interest for new home construction weakened in the fourth quarter of 2022, driven by high mortgage rates and elevated new home prices.  The latest Housing Trends Report (HTR) shows that the share of prospective buyers looking to buy new construction dropped to 20% in the final quarter of 2022, down from 27% a quarter earlier. The latest decline in interest for new homes happened nationwide. From the third to the final quarter of 2022, the share of prospective buyers looking to purchase a new home fell in all four regions, most prominently in the West (31% to 21%), but also in the Northeast (27% to 20%), Midwest (18% to 15%), and South (26% to 20%). * Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here. This is the second in a series of six posts highlighting results for the 4th quarter of 2022.  See previous post on plans to buy. Related ‹ Employment Situation in December: State-Level AnalysisTags: housing economics, housing trends report

Popularity of New Homes Declines in Final Quarter of 20222023-01-25T09:14:25-06:00

Fewer Adults are Planning a Home Purchase

2023-01-23T09:18:17-06:00

By Rose Quint on January 23, 2023 • The share of adults planning a home purchase in the next 12 months dropped to 13% in the final quarter of 2022, down from 15% in the previous quarter.  The drop is not surprising, given that housing affordability worsened during this period, as mortgage interest rates surpassed 7.0% and reached levels not seen in nearly 20 years. In the third quarter of 2022, as buyers tried to stay ahead of further interest rate hikes, the share of prospective buyers contemplating a home purchase for the first time spiked to 66%.  In the fourth quarter, as rates did in fact reach levels not seen since 2002, the share dropped again, to 61%. The share of adults with plans to buy a home within a year changed unevenly across regions from the third to the final quarter of 2022, dropping in the Northeast (15% to 11%) and West (20% to 14%), staying flat in the South (at 14%), and edging up in the MW (9% to 10%). Over half of all prospective buyers in every region are first-time buyers. From the third to the fourth quarters of 2022, however, the 1st-timer share dropped in three regions: the Northeast (70% to 64%), the South (66% to 60%), and the West (70% to 62%).  Meanwhile, and for the second quarter in a row, the share edged up slightly in the Midwest, from 56% to 58%. ** Results come from the Housing Trends Report (HTR) – a research product created by the NAHB Economics team with the goal of measuring prospective home buyers’ perceptions about the availability and affordability of homes for-sale in their markets.  The HTR is produced quarterly to track changes in buyers’ perceptions over time.  All data are derived from national polls of representative samples of American adults conducted for NAHB by Morning Consult.  Results are seasonally adjusted.  A description of the poll’s methodology and sample characteristics can be found here.  This is the first in a series of six posts highlighting results for the 4th quarter of 2022. Related ‹ Existing Home Sales End 2022 with Weakest Year Since 2014Tags: housing economics, housing trends report

Fewer Adults are Planning a Home Purchase2023-01-23T09:18:17-06:00

Nearly Two-Thirds of Homes Started in 2021 are in Community Associations

2022-12-15T10:24:18-06:00

By Ashok Chaluvadi on December 15, 2022 • According to data from the Census Bureau’s Survey of Construction (SOC), 65.5 percent of single-family homes started in 2021 were built within a community or homeowner’s association. Since the re-design of the SOC in 2009, this was the second highest percentage for new homes started with an association. The Census Bureau defines community or homeowner’s associations as “formal legal entities created to maintain common areas of a development and to enforce private deed restrictions; these organizations are usually created when the development is built, and membership is mandatory.”  In absolute numbers, a total of 729,109 homes with community associations were started in 2021, compared to 657,378 in 2020. The share of all new homes built within a community or homeowner’s association declined slightly to 62.0 percent in 2019, after a decade long upward trend. In 2009, the share was 47.6 percent, and in 2010, 48.0 percent. Since 2011, more than 50 percent of all homes have been built within a community or homeowner’s association. In 2018, the share was 62.5 percent, the second highest and in 2021, 67.1 percent was the highest since 2009. When analyzed by the 9 census divisions, the highest share was in the Mountain Division, where 82.4 percent of new homes were in such communities. In the New England Division, on the other hand, the share was only 34.5 percent. In the West South-Central Division, 73.1 percent of new homes started in 2021 had a community or homeowner’s association, followed by the South Atlantic Division at 71.3 percent, and the East North-Central Divisions at 54.9 percent. In the Pacific Division, the share was 52.1 percent, while in the West North-Central Division, it was 50.6 percent. In the East South-Central and Middle Atlantic Division 39.4 percent and 35.8 percent of new homes started in 2021 were within a community or homeowner’s association, respectively. Related ‹ Property Taxes by State – 2021Tags: eye on the economy, home building, housing economics, single-family

Nearly Two-Thirds of Homes Started in 2021 are in Community Associations2022-12-15T10:24:18-06:00

Custom Home Building Share Declines Slightly

2022-12-08T09:15:08-06:00

By Ashok Chaluvadi on December 8, 2022 • According to data from the Census Bureau’s Survey of Construction (SOC), custom homes accounted for 17.6 percent of new single-family homes started—down slightly from the 17.8 percent recorded in 2021 and the lowest the annual custom home share has been since the 2005 re-design of the SOC.  The custom home market consists of contractor-built and owner-built houses—homes built one at a time for owner occupancy on the owner’s land, with either the owner or a builder acting as a general contractor. The alternatives are homes built for sale (on the builder’s land, often in subdivisions, with the intention of selling the house and land in one transaction) and homes built for rent.  In 2021, 77.0 percent of the single-family homes started were built for sale, and 5.4 percent were built for rent. Although the custom-home percentage declined slightly in 2021, more single-family homes were started; so, the number of custom homes started in 2021 (199,683) was actually higher than the number of custom homes started in 2020 (176,499). The quarterly published statistics show that the custom-home share of single-family starts stayed relatively flat through the second quarter of 2022. Although the quarterly statistics are more timely, they lack the geographic detail available in the annual data set. When analyzed by the 9 census divisions, the annual data show that the highest custom home share in 2021 was 40.1 percent New England Division. In the South Atlantic Division, on the other hand, the share was only 11.5 percent. In the East South-Central Division, 38.8 percent of new homes started were contractor-built or owner-built houses, followed by the East North-Central Division at 32.8 percent and 31.5 percent in the Middle Atlantic Division. In the West North Central Division 20.3 percent of new homes started where custom homes, followed by 15.0 percent in the West South-Central Division, 14.7 percent in the Pacific Division, and 12.9 percent in the  Mountain Division. Related ‹ Share of Bedrooms in New Homes in 2021Tags: construction, economics, eye on the economy, home building, housing economics, starts

Custom Home Building Share Declines Slightly2022-12-08T09:15:08-06:00

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