Real estate remodeling as a leading indicator for stocks

Report reveals 4 US cities' surprise economic strength

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Aug. 19, 2011

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Report reveals 4 US cities' surprise economic strength

Steve Bergsman
Inman News™

Investors look at all sorts of extraneous data points to determine which way the stock market will turn in the near future. Of course, most stock analysts scrutinize the economy or global events, but there are a few who try to predict the future by observing weird phenomena such as whether a team from the old National Football League or the American Football League wins the Super Bowl.

(If there's a winner from the old NFL, now the National Football Conference, some believe that indicates a bull market is ahead.)

I propose a new yardstick: What's happening with home remodelers.

Let's, for example, use Dave Fox Design/Build Remodelers of Columbus, Ohio, as our primary benchmark.

For the first six months of 2011, the company had been on a tear. In fact, its pace of new business through June was very close to that of 2006, and both 2005 and 2006 were absolute boom years for the company.

"We've seen a lot more people adding square footage to their homes," said Bryce Jacob, a vice president of the employee-owned company. "We've done a lot of additions, planned a lot of increased square footage to homes, and that's beyond our traditional business of remodeling interior space, primarily kitchens and bathrooms."

Columbus is a white-collar town, Jacob explained, and most of the homeowners his company works with "have strong business acumen."

The good fortune of the company paralleled that of the stock market: with the Dow up 7.2 percent and the Standard & Poor's 500 Index rising 5 percent in the first half the year.

While all that looks good, June turned out to be a choppy month for stocks (the Dow down 1.1 percent and S&P off 1.67 percent), and the poor employment statistics at the start of July made the market look like a downward-facing dog.

Meanwhile, if you were following the fortunes of Dave Fox Design/Build Remodelers, you would have known to turn bearish on the market.

When I spoke with Jacob in the first week of July, this is what he told me: "We are in our fourth week of some of the poorest lead activity in five years. It's worse than during the downturn when we were crashing into the recession."

Remodeling activity usually slips in the summer months, when families go on vacation, but this slide in lead activity was more serious than usual, meaning Dave Fox Design/Build Remodelers was probably looking at a dramatic dip in sales over the next four to six weeks.

Stock market investors beware.

So was the activity level at Dave Fox Design/Build Remodelers an anomaly?

Not according to Washington, D.C.-based Hanley Wood LLC, which bills itself as a top media company covering the construction industry and the originator of the Residential Remodeling Index, a quarterly measure of the level of remodeling activity in 366 metro areas.

In its most recent release, which covers the first quarter of 2011, remodeling and replacement activity declined 1 percent, and a dubious trend line was developing.

According to Hanley Wood, remodeling activity bottomed out in the final quarter of 2009 and was on the upswing during the first half of 2010, the first resurgence the industry had experienced since 2007. Thankfully so, because from peak to trough the remodeling and replacement index measured a total decline of 22 percent.

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