Remodeling Market Update

Remodeling Market Update Kermit Baker Remodeling Futures Conference October 27, 2015

Home Improvement & Repair Spending is Still On Track to Reach Its All-Time High By Year End National home improvement and repair market size estimates (billions of $) $400 Spending 20% $350 $300 $301.4 $324.4 $306.5 $290.7 Annual % change $282.4 $288.5 $281.0 $297.2 $318.0 7.0% $326.1 15% 10% $250 7.6% 2.6% 3.0% 2.5% 5% $200 $150 $100-4.5% -5.2% -2.9% -0.5% 0% -5% -10% $50-15% $0 2006(e) 2007 2008(e) 2009 2010(e) 2011 2012(e) 2013 2014(e) 2015(f) -20% Notes: Non-AHS years (even number years) are estimated using Census Bureau C-50 and C-30 data. Forecast created using JCHS LIRA estimates. Sources: JCHS tabulations of HUD American Housing Surveys, Census Bureau C-50 and C-30 and JCHS Research Note N10-2. 2

While Most Industry and Consumer Metrics Have Recovered From Recession, Financial Sector Indicators Have Not Recent Past Peak Recent Trough 2014 Current Remodeling Industry Total remodeling spending ($ billions) $324.4 $218.0 $317.2 $326.1 Remodeling spending rental units ($ billions) $54.5 $49.7 $59.5 $60.0* Existing home sales (millions) 6.2 3.7 4.3 4.9 National house prices (index: Jan., 2000 =100) 198.7 134.9 171.1 186.1 Remodeling contractor payrolls (thousands) 324.3 220.2 281.9 304.7 Unemployment rate construction workers (%) 6.9% 22.7% 8.3% 5.5%* Retail sales building materials ($ billions) $299.4 $226.0 $273.9 $287.6 Consumer Consumer sentiment (index: 1966=100) 98.0 59.7 84.1 92.1 Household income (median, inflation-adjusted) $57,400 $52,600 $53,700 $54,700 Financial Prime lending rate 8.25% 3.25% 3.25% 3.25% Share of home mortgages underwater (%) 8.0% 31.4% 17.6% 14.4% Cash out mortgage refinancing activity ($ billions) $320.5 $24.9 $24.9 $35.5 Notes: Historical estimates of share of home mortgages underwater from HUD analysis of AHS; current household income estimated from 2015 ECI growth. Sources: JCHS, NAR, CoreLogic, USDOL, US Census Bureau, Conference Board, FRB, Freddie Mac. 3

Home Improvement Industry Trends and Issues Home improvement financing remains depressed in spite of broader market recovery; Sustainability projects continue to be important home improvement segment, with recycled/reclaimed materials a market served by over a third of contractors; Changes in the rental market offer remodeling opportunities for traditional remodeling businesses; Larger contractors seeing disproportionate share of market growth at present; Contractors optimistic about prospects for 2016. 4

House Prices Continue to Recover Nationally, Having Gained Back Nearly 80% of Their Losses Single-family house price index (Jan. 2000=100) 210 200 190 180 170 160 150 140 130-32.1% +37.9% Source: CoreLogic National House Price Index (HPI), Single family attached and detached structures as of August, 2015. 5

Average Home Equity Levels for Owners Have Almost Fully Returned to Pre-Downturn Levels Average equity per owner (thousands of $) $180 $160 $168.1 $151.6 $163.0 $140 $135.9 $137.0 $120 $100 $80 $93.4 $90.6 $86.7 $85.0 $106.9 $60 $40 $20 $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-2 Note: Average equity per owner based on occupied units only. Sources: Federal Reserve Board, Flow of Funds, table B. 100; and Housing Vacancy Survey. 6

As Owners Pay Down Older Lines, Home Equity Loans Outstanding Continue to Trend Down 1.5 Home equity lines of credit and loans, amount outstanding at end of period (trillions of $) 1.13 1.12 1.0 1.03 0.93 0.85 0.77 0.70 0.67 0.66 0.65 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015-1 2015-2 Source: Federal Reserve Board, Flow of Funds Accounts, Q-2, 2015; Tables F.218 and L.218. 7

After Falling Dramatically During the Downturn, Cash Out Refinancing is Beginning to Modestly Increase Mortgage refinance total home equity cashed out during quarter (billions of $) $100 $80 $60 $40 $20 $0 Source: Federal Home Loan Mortgage Corporation. 8

Although Credit Options are Becoming More Popular, Industry Still Relies Heavily on Cash Method of payment for large ticket project over the next 12 months; respondent asked to select all that apply 80% 70% 75% 70% April, 2012 60% April, 2015 50% 40% 30% 20% 10% 0% 31% 31% 6% 8% 11% 9% 10% Cash Credit Card Bank Loan Retailer Credit Home Equity Line of Credit 20% 2% 2% Other Source: Piper Jaffray 7 th Home Improvement Survey, April, 2015. 9

As Discretionary Activity Begins to Pick Up, Sustainable Improvements Account for Smaller Share of Firm Revenue Share of home improvement projects (on a dollar basis) for which firms installed products in any environmentally sustainable and related remodeling categories (percent): 40% 30% 20% 28% 30% 27% 24% 20% 10% 0% 2013-2 2014-1 2014-2 2015-1 2015-2 N=251 N=300 N=352 N=307 N=231 Note: Includes remodelers who did no sustainability projects. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2013-2015. 11

Recycled/Re-used Products Apparently is a Significant but Not Dominant Niche for Contractors Share of contractors installing environmentally sustainable and related remodeling project/product (percent) Energy efficiency Water efficiency/conservation Healthy home/indoor environmental quality Use of recycled products or re-use of existing materials Use of rapidly renewable products 28 36 53 55 75 Home automation 23 Renewable energy 11 0 20 40 60 80 Notes: N=231. Respondents were asked to select remodeling projects and/or products that their company has installed in recent years. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2015:Q2. 12

Contractors Report that Millwork Categories Most Commonly Recycled/Reclaimed Products Share of contractors installing projects/products of those contractors involved in recycled/ reclaimed content projects (percent) Doors/windows/cabinets Wood flooring Dimensional lumber Brick/stone/tile Resurfacing (rather than replacing) Carpet with recycled content Cellulose insulation Plumbing/fixtures/products 70 60 54 54 53 31 31 21 0 20 40 60 80 Notes: N=70. Respondents were asked to select recycling/reclaimed products that their company has installed in recent years. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2015:Q2. 13

Clients Motivations Included Style/Design Preferences, Healthy Home Concerns Share of contractors who indicated the following were very important for clients when deciding whether to install recycled or reclaimed content (percent) Style/design preferences 56% Indoor environmental health 54% Minimizing disruption/ length of projects 47% Saving natural resources 39% 0% 10% 20% 30% 40% 50% 60% Notes: N=70. Question was asked only of remodelers who installed recycled/reclaimed content. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2015:Q2. 14

Higher Costs and Availability Top Contractor Concerns With Recycled/Reclaimed Products Disadvantages to installing recycled/reclaimed content products (percent; frequency of perception) Higher cost 59 Low availability 40 Quality/durability concerns Safety concerns/risks 0 10 20 30 40 50 60 70 37 37 Notes: N=83. Respondents who have installed recycled/reclaimed products in recent years were asked to select disadvantages to using recycled/reclaimed content products in their business practice. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2015:Q2. 15

Most Contractors Engaged in Recycled/Reclaimed Product Installation Are Utilizing Reclamation Centers Engagement with reclamation centers among contractors engaged in recycled/reclaimed/reused-content projects (percent; frequency of activity) Not aware of any reclamation centers, 16% Buy and Donate, 44% Rarely Buy/Donate, 17% Donate, 16% Buy, 7% Notes: N=83. Respondents installing recycled/reclaimed content products/projects were asked to identify presence of reclamation center(s) in their market area and their engagement with them. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, The Farnsworth Group, 2015:Q2. 16

So Far in the 2010s, Renter Household Growth Has Outstripped the Pace in Any Previous Decade Average Annual Change in Renter Households (Thousands) 1,000 903.3 800 600 400 333.7 503.1 432.7 274.2 506.6 200 0 96.1 1950s 1960s 1970s 1980s 1990s 2000s 2010-14 Source: JCHS tabulations of US Census Bureau, Decennial Censuses and Housing Vacancy Surveys. 18

Single-Family Homes Have Accommodated a Significant Share of Increased Rental Demand 1,000 Average Annual Change in Occupied Rental Units (Thousands) 800 600 400 200 0 1970s 1980s 1990s 2000 05 2005 10 2010 13 Multifamily Single-Family Note: Data exclude mobile homes. Source: JCHS tabulations of U.S. Census Bureau, Decennial Censuses and American Community Surveys. 19

As a Result, Millions of Single-Family Homes Became Rentals During Housing Downturn Net Owner-to-Renter Conversions (Millions) 2.0 1.7 1.5 1.0 0.5 0.0-0.5 1.1 0.7 0.4 0.1 0.2-0.1-0.2 2003 05 2005 07 2007 09 2009 11 Single-Family Multifamily Source: JCHS tabulations of US Department of Housing and Urban Development, American Housing Surveys. 20

Revenue Growth of Larger Contractors This Upturn Has Consistently Outpaced Overall Market Gains Annual % change 15% 10% 8.0% 10.2% 8.7% 7.5% 10.8% 11.5% 5% 5.1% 3.1% 5.1% 3.5% 0% -5% -10% Revenue of larger-scale remodelers Total improvement & repair spending -3.9% -9.3% -15% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: Analysis includes remodelers reporting revenue in two consecutive years and ranking in the top 400 in at least one of those years. Sources: JCHS tabulations of Qualified Remodeler magazine s Top 500 Remodelers and JCHS annual remodeling market size estimates. 22

With Recovering Market, Contractors Serving Discretionary Market Seeing Stronger Growth Median annual rate of change in remodeling revenue by business type 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.6% 12.5% 10.2% 7.4% 2013 2014 8.7% 14.0% 18.6% Design/Build Full-Service Exterior Kitchen & Bath 8.7% 7.8% 8.1% Insurance Restor 11.5% 10.8% All Note: Analysis includes remodelers reporting revenue in two consecutive years and ranking in the top 400 in at least one of those years.. Source: JCHS tabulations of Qualified Remodeler magazine s Top 500 Remodelers.

Average Project Size Up Significantly Over Past Few Years, But Still Below Market Peak for Most Specialties Median average job size (Thousands of $) $100 $80 Design/Build (left) Full-Service (left) Exterior Replacement (right) $20 $16 $60 $12 $40 $8 $20 $4 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $0 Source: JCHS tabulations of Qualified Remodeler magazine s Top 500 Remodelers.

Remodelers Estimate Revenue Growth of Around 10% This Year Projected growth in company revenue in 2015 (percent of firms by projected change) Decline >5% 10% Increase 25% or + 13% About the same (+/- 5%) 36% Increase 10%-24% 22% Increase 5%-9% 19% Average estimated growth = 10% Notes: N=220. Estimates are weighted average of responses in the categories. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, the Farnsworth Group, 2015:Q2. 26

With More Modest Optimism About the Prospects for 2016 Projected change in company revenue in 2016 (percent of firms by projected change) Don't know/not sure 8% Lower 4% Significantly higher 7% Somewhat higher 39% About the same 43% Notes: N=231. Estimates are weighted average of responses in the categories. Source: JCHS Survey on Environmental Sustainability Trends in Remodeling, the Farnsworth Group, 2015:Q2. 27

The Leading Indicator of Remodeling Activity Points to an Accelerating Growth Moving into 2016 Homeowner Improvements Four-Quarter Moving Totals Billions of $ $200 $190 $180 $170 $160 $150 $140 $130 $120 $110 $100 2.1% 4.2% 7.2% 8.0% $121.9 $126.0 $129.3 $130.8 8.9% 5.6% 2.2% $132.7 $133.1 $132.1 6.1% $138.7 3 4 2013-1 2 3 4 2014-1 2 (e) 10.0% 7.7% 6.5% 4.3% $146.0 $143.4 $140.7 $144.7 3 (e) 4 (e) 2015-1 (e) 2 (e) 2.4% Four-Quarter Moving Rate of Change 3.4% 4.4% 6.8% $149.4 $148.3 $146.9 $154.5 3 (e) 4 (p) 2016-1 (p) 2 (p) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% US Census Bureau LIRA Notes: (e) estimated; (p) projected. Historical data from the second quarter 2014 onward is estimated using the LIRA. Source: Joint Center for Housing Studies of Harvard University. 28

Even With Recent Growth, Current Spending Levels Below Long-Term Market Trend $400 National home improvement and repair market size estimates (billions of $) $350 $300 $250 $200 $150 $324 $318 $326 $301 $307 $291 $280 $282 $281 $289 $297 $254 $214 $220 $228 $199 $149 $157 $161 $163 $180 $100 $50 $0 Notes: Non-AHS years (even number years) are estimated using Census Bureau C-50 and C-30 data. Forecast created using JCHS LIRA estimates. Sources: JCHS tabulations of HUD American Housing Surveys, Census Bureau C-50 and C-30 and JCHS Research Note N10-2. 29

Applying Trend Growth Rates, Remodeling Should be a $350 Billion Market by 2017 National home improvement and repair market size estimates (billions of $) $400 $350 $300 $250 $200 $150 $345 $355 $324 $318 $326 $301 $307 $291 $280 $282 $281 $289 $297 $254 $214 $220 $228 $199 $149 $157 $161 $163 $180 $100 $50 $0 Notes: Non-AHS years (even number years) are estimated using Census Bureau C-50 and C-30 data. Forecast created using JCHS LIRA estimates. Sources: JCHS tabulations of HUD American Housing Surveys, Census Bureau C-50 and C-30 and JCHS Research Note N10-2. 30

Summing Up In spite of general industry strength, restrictive financing holding back spending, particularly at upper-end; Recycled/reclaimed products a growing sustainability market, but supply issues seem to be limiting growth; Much of recent growth of rental stock is single-family detached homes; a market traditionally served by the owner-focused home improvement contractor; Growth rates for larger contractors outpacing overall industry, in part due to increase in project size; Returning to historical growth trend would generate about 10% growth by 2017; 31