Remodelers Hit With Perfect Storm of Increased Costs and Lowering Demand

Sometimes you can not win for losing. Contractors and builders who got used to the perpertual demand for their labor are now getting a strong dose of reality. They got comfortable quoting high rates and long lead times to build up a constant supply of work and a new truck every year. Now it may be time to pay the piper.

With the housing slowdown many of these tradesman are now stuck in the middle. The homebuilders are not putting much new inventory on the market so the subcontractors are not in demand for new construction. “Residential specialty trade contractors, such as carpenters, drywall workers and flooring installers, cut payrolls by 17,500 last month, the biggest decline in six months, after adding about 1,900 in August, the Labor Department said.”(via the Chicago Tribune)

Typically when new construction slowdowns happen, these guys flood the remodeling market to get work lowering the rates that can be charged for a job. The contractors who have been doing remodeling have been able to charge above average rates. The combination of scarce labor and increasing housing prices had homeowners not wanting to quibble about price. There was enough work available that they could not take the risk of the contractor leaving them and the projects not done. So the homeowner paid top dollar and waited patiently for the work to be done.

Also, when a housing slowdown happens, the cost of raw materials drops as demand drops, so the re-modelers have the opportunity to buy their supplies at a less expensive price to keep their profit margins steady. But not for 2006.

Boosted by higher metals, concrete and fuel prices, construction input prices jumped 8.8% in August from the same month a year ago. The price index for highway and street construction jumped 13.8%, and home construction gained 8%, said the contractors group’s analysis of Labor Department data. via the WSJ

So here we have the triple threat for remodelers occurring.

• New construction slows down and the labor market is flooding with qualified laborers who will lower rates that can be charged for labor. The phrase “every yahoo with a pickup” opening their own business will be heard often.
• Housing prices declining making homeowners less likely to invest in updating and investing in their property.
• Construction supply costs rising significantly above the inflationary rate eating into the profit margin of jobs bid.

So who will win. It will be the folks that always have won. The remodelers who were fair and honest when business was rocking and rolling. The ones that gave the customers an honest time frame for when they would come back and do the work and charged a honest price. They will have the good will on the street. The word of mouth references that will make their businesses grow and succeed.

The remodelers that lied to the customer to get the job about when they would show up, dropped cost increases on the customer, and generally give the business a bad name will be hurting. They abused the system when things were doing well. Now, when the market slows down, they will not have the references to get new work and grow their business. Odds are they will be squeezed every which way, and if they fall into their old tricks, will be replaced by the new construction guys who are looking for any work.

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