Articles
"Contractors Cut Prices As
Remodeling Boom Slows", WSJ, © Sara Schaefer Munoz, 1/19/06
After years of high prices and work backlogs in the $150 billion home
remodeling market, a slowdown in business is pushing some contractors to offer
perks and discounts to their clients for the first time in ages.
This month, S.R. Crowley Contractors, a Lewiston, Maine-based firm, began
offering a 10 percent total discount on all jobs. The president of Harmony
Kitchen & Bath, outside Ann Arbor, Mich., now makes himself available to
meet clients on evenings and weekends. Recently, Bachmann Construction, in
Madison, Wis., started giving clients free schematic drawings and more detailed
estimates -- services that normally costs up to $2,000.
The incentives reflect a recent slowdown in spending on home remodeling.
Spending rose just 4.3 percent in 2005 compared with 2004 levels, which
increased nearly 20 percent from 2003, according to estimates from Harvard
University's Joint Center for Housing Studies. The center expects growth to stay
in the single digits for 2006 as well. The most recent data from the U.S.
Commerce Department is even starker: Spending was actually down 4.1 percent in
November from the month before.
"For consumers, this means they are going to get contractors who return phone
calls, and they are going to be able to get two or three bids, instead of just
one," says Kermit Baker, a senior research fellow at the Harvard center.
A cooling housing market and rising mortgage and interest rates are driving
the slowdown. Low rates in recent years led many homeowners to refinance their
mortgages and take out cash for renovations. Some consumers saw big renovation
projects as a way to boost their home's value even further in a frenzied housing
market. Surging demand for renovations created situations where consumers often
had to wait for months on end for workers to get started and sometimes couldn't
get firms to take on smaller jobs.
But as interest rates climb and the real-estate market shows signs of
softening, homeowners are growing more cautious about sinking a lot of money
into large-scale renovations. Those who are still embarking on projects are
scaling back, some contractors say, putting money into existing rooms where they
spend a lot of time, rather than going for large-scale additions.
Mortgage giant Freddie Mac predicts that rates on 30-year fixed-rate
mortgages will rise to 6.5 percent by the end of the year, up from the current
6.15 percent. Home-equity credit lines are tied to the prime interest rate,
which is now 7.25 percent, up from 5.25 percent a year ago.
To be sure, much of the remodeling market around the country remains strong.
Vince Butler, chairman of the Remodelers Council of the National Association of
Home Builders, says that the softening is in the Midwest and pockets of the
South and Northeast, but that in most coastal areas and Western states, business
is still booming. In some robust areas like Northern California, however, some
contractors report the backlog time -- the time it takes for contractors to
start work on your project -- has shrunk to about three months from nearly five.
The new incentives are convincing some consumers to begin new projects. Alice
Harris was on the fence about renovating a half-bathroom in her home in Ann
Arbor, Mich., until she got several fliers this fall from Cardea Construction,
offering 10 percent off if she paid for the work upfront. At the end of
December, she signed on to the $12,000 project. "We had been talking about
getting it done and it helped spur our decision," said the 49-year-old
University of Michigan employee.
Cardea Construction owner Patricia Harroun says in the past six months she
has lowered her profit margins by 5 percent and stepped up marketing efforts.
"Everything has tightened up," she says.
The new discounts also come at a time when the industry -- tarnished by tales
of unethical contractors who don't follow up on sloppy jobs or who take the
money and run -- is trying to burnish its image. According to the nonprofit
advocacy group Consumer Federation of America, based in Washington,
home-improvement repairs topped the list of complaints to state and local
consumer protection agencies in 2003 and 2004.
In response, the National Association of the Remodeling Industry last year
stepped up its offerings of seminars for members, emphasizing good business
practices and the importance of maintaining good relations with customers. Tom
Stephani, a contractor from Crystal Lake, Ill., who gives his own seminars to
contractors on business management and customer relationships, says he has seen
class enrollment increase by 10 percent in the past year.
"When business is good and falling out of trees, it's pretty easy -- but it's
getting to the point where you need to have something more than just a truck and
some tools," says Mr. Stephani.
Many contractors are also offering more personal touches. William Owens, of
Owens Construction in Powell, Ohio, sends fruit baskets to clients around
Christmas and plans to start doing one-year anniversary follow-up visits, to
make sure the customer is satisfied. "We are servicing the heck out of them," he
says. This holiday season, Don Novak, of Novak Construction in Cedar Rapids,
Iowa, gave most of his clients gift certificates to local restaurants -- a perk
usually reserved for a select few. He's also been offering prices on items like
light fixtures for just 10 percent above their wholesale value, instead of the
usual 35 percent markup.
Another way some remodeling firms are distinguishing themselves in a tighter
market is by offering a wider variety of services. This means consumers can
expect to see firms that offer not just construction, but electrical or design
work as well. And they may be able to find lower prices for these new services:
Home Improvement Services LLC, in Prairie Village, Kan., hired its own
electrician and several months ago began offering a 15 percent discount on all
electrical jobs to launch that new section of the business. "The companies that
offer more than one service are going to weather any slowdown," says owner Ron
Sobanek.
Steve Madole, president of Architrave Design and Remodeling in St. Paul,
Minn., now offers a complimentary lighting design, in which he assesses the
types and lumens of light necessary to best illuminate kitchen counters and
other workspaces. It's something he used to charge $300 for but now includes as
part of his free estimate.
For Allen Levine, a food-science professor in St. Paul, the extra service was
a deal maker. Mr. Levine had gotten three bids for his current $70,000 kitchen
remodeling job. He chose Mr. Madole's firm after he saw the lighting design. "It
was really an incentive to have a guy with that level of attention to detail,"
Mr. Levine says.
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