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.
Then the sky turned cloudy. The Hanley Wood first-quarter report noted: "The third quarter (2010) ran out of steam, and the fourth quarter registered a decline. Now 2011’s first quarter is showing nationally that activity slowed further, registering at 2009’s low point."
To find out what was going on, I called Jonathan Smoke, Hanley Wood’s executive director of research.
The first thing he did was school me on the facts of life for remodeling. "Many people believe (I was one of them) that remodeling and replacement activity is inversely correlated with new construction, meaning that when new construction is down, remodeling does well," Smoke said. "Inversely, when construction takes off, remodeling does not. That’s simply not true."
In actuality, remodeling and new construction rise and fall together, and an increase or decrease in activity is all tied to things like job growth, income growth and consumer confidence.
These past two years have been an interesting roller-coaster ride, said Smoke. "In the first half of 2010, activity started to improve. At the time, the economy was doing better and we were optimistic remodeling activity would increase. Then declines happened in the fourth quarter … and first quarter this year."
The problem, as perceived by Hanley Wood, was a volatile mix of declining consumer confidence, house prices continuing to dip, and worries about unemployment.
Smoke tries to stay optimistic. "We will be flat in the second quarter and maybe we will finally see some gain by the end of the year," he said.
Just out of curiosity, I asked Smoke which U.S. markets were currently tops in remodeling. I wasn’t surprised to learn that the Texas cities of Houston, Dallas and Austin were No. 1, No. 2 and No. 4, respectively.
Denver popped up at No. 5, Boston at No. 7, and Seattle No. 10. The remaining four cities were the surprises, as all were in the middle of the country: No. 3, Minneapolis; No. 6, Kansas City; No. 9, Oklahoma City; and, coming in at No. 8, Columbus, Ohio, home to Dave Fox Design/Build Remodelers.
The center of the country is experiencing a relatively strong economy, with a lot of strength in agriculture and commodities, Smoke said. "The healthiest markets are performing better than the national average, and some markets are seeing increased activity already."
Jacob, of Dave Fox Design/Build Remodelers, may be nervous about the year ahead, but he’s still in a good spot geographically.
