HOUSING: Supply up, demand down in remodeling

Zach Fox, North County Times, Escondido, Calif.

May 4--Homeowners have the upper hand if they want another room or a new kitchen.

Because the housing downturn has turned building into an investment black hole, some homebuilders and contractors have turned to remodeling.

Also, fewer homeowners are revamping their homes, meaning those who do have a bevy of options and the luxury of leverage.

Reports released within the last month show remodeling activity was down significantly in 2007 and predict that 2008 will be even weaker. Analysts point to a credit crunch that has tightened bank lending and falling home prices as causes, while some consumers say the result leaves them with negotiating power as they move forward with remodeling projects.

One builder that has shifted its focus to remodeling is Venture Pacific Development of Encinitas, which used to build only custom homes.

A housing recession that has cut new home sales in San Diego County by 50 percent from a year ago forced the company away from building and into remodeling only, said Robert Booker, the company's president, in an interview last week.

"We completely retooled ourselves," Booker said. "You just have to do what you've got to do to make ends meet right now. It's an ugly process, but there's absolutely no reason to build spec homes right now."

"Spec," or speculative, homes are ones that builders construct without a buyer under contract, anticipating that the company can sell the product on the open market.

Booker's company, which had been selling 10 to 15 homes for between $1 million and $2 million during the boom, will soon get back into building homes after winning two contracts to build custom homes, which they will start constructing in the fall.

Several other local builders, including Michael Crews Development in Escondido and Barratt American in Carlsbad, have also shut down all speculative building in North County until the market improves.

Building-permit numbers, considered an indicator of future construction activity, suggest the anemic new home building rate will persist for a while. Builders "pulled" 63.6 percent fewer permits in the first quarter this year than in the same period a year ago, according to the Construction Industry Research Board, a Burbank company that tracks permits.

The emergence of more remodeling companies, such as Venture Pacific, is not the result of a boom in consumer demand for remodeling, which has actually fallen, according to recent reports.

Remodeling activity fell 15 percent from a year earlier through the fourth quarter of 2007, according to an index produced by the National Association of Home Builders, a Washington-based industry group.

A separate report by Harvard University's Joint Center for Housing Studies forecasts that remodeling spending will be down 5 percent nationally in 2008 from the year before.

Economists say that is because homeowners are skittish about spending money to improve a depreciating asset. San Diego County home prices fell 19.2 percent in February from a year earlier, according to the Case-Shiller Home Price Index, a widely followed home price report released last Tuesday by Standard & Poor's.

Though Amy Masuda of Del Mar was concerned about spending money on her home, she said her family plans to live for a long time in the house they bought in March, making the current downturn less of a concern.

Furthermore, the depressed market allowed her negotiating power when buying the Del Mar home and when securing a remodeling company to add a room.

The buying and remodeling experience were welcome contrasts to an Oakland home purchase and remodel that her family made eight years ago, she said.

The market has allowed for consumer leverage, Masuda said. "Back then, we had absolutely none. There were multiple offers bidding well over the asking price. ... Now, you make an offer and see what happens."

However, not all homeowners are able to afford remodeling projects after a credit crunch, which has led to more difficult loan requirements and frozen home equity lines of credit, a source of remodeling money for some homeowners.

Also, fewer home sales translates into fewer remodeling projects, said Gopal Ahluwalia, vice president of research for the home builders association.

People tend to spruce up homes before putting them on the market and change kitchens or bathrooms they don't like after buying homes, he said.

Still, the drop in remodeling activity is less severe than the dive in existing and new home sales.

"If you go home today and your roof is leaking or your heating blows out, you're going to fix it. Half of remodeling is maintenance or repair that can't be put off," Ahluwalia said. "But if you want a new kitchen or bathroom, that's something you can postpone."

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