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Remodelers Lost Confidence in Final Quarter of 2016

Jan. 20, 2017

The confidence of remodelers dropped in the final quarter of 2016, but confidence has managed to stay in positive territory for 15 consecutive quarters, according to the latest reading of the National Association of Home Builders’ (NAHB) Remodeling Market Index (RMI).

The latest RMI was 53, down four points from the third quarter of 2016; an RMI reading above 50 indicates more remodelers reported market activity that was higher than lower when compared to the prior quarter, NAHB said.

“At 53, the Remodeling Market Index is consistent with NAHB’s forecast that remodeling market activity will continue to grow over the next two years, but at a more moderate annual rate of 1% to 2%,” said NAHB Chief Economist Robert Dietz.

“Many remodelers are seeing consumers commit to larger, long-term home improvement projects,” said 2017 NAHB Remodelers Chair Dan Bawden, a remodeler from Houston, in an NAHB press release. “As Americans are seeing wages and home values rise overall, it gives them greater confidence to go ahead and invest in their homes.”

The RMI’s current market index fell three points to 53, dragged down by components to the index that include major additions and alterations, demand from smaller remodeling projects, and home maintenance and repair, NAHB said.

Remodelers looking at future market indicators were less confident in the fourth quarter of last year, as the related index dropped six points to 52, the organization said. Components of the index that led to the decline include calls for bids, appointments for proposals, job backlog and amount of work committed.

– Nicholas Stern, editorial associate

Creditors Must Assess Risk of State Projects

Jan. 20, 2016

Construction trade creditors working on public projects, particularly those involving state projects, should bring a higher level of scrutiny to determine the quality of payment bonds obtained by smaller businesses taking on large projects.

Unlike federal construction projects, which require payment bonds with an “A” rating or higher, most state projects just require that the surety be permitted to write payment bonds in that state, not that the bonds receive a rating, said Chris Ring of NACM’s Secured Transaction Services (STS). The need to investigate the creditworthiness of such bonds and the firms that hold them was brought home by a recent law—Senate Bill 123—passed in New Jersey.

In part, the law establishes a Small Business Readiness Assistance Program that provides instruction for small companies through a series of educational workshops about qualifying for surety bonds. While finer details about how this program will work aren’t yet entirely clear, Ring says credit managers in New Jersey and a number of other states where these types of programs are in place should take heed that it’s more important than ever to verify the validity of the bonding company.

“What this law tells me is that New Jersey is seeing a lot of small businesses that aren’t able to qualify for large government contracts because they can’t qualify for bonds or go through the process of obtaining them,” he said. “Now, since New Jersey is trying to help small businesses post bonds on larger contracts, it means these contractors may be going on to secondary markets to put these bonds in place. By definition, that’s risk. I’m concerned for our customers when the government is trying to put smaller businesses in the larger market. Some will do well, but most won’t.”

Ring said one way to verify the rating of a bonding company is to check the Treasury Department website, which lists acceptable sureties with an “A” rating or higher. STS also offers a service for checking the rating of a bonding firm for state projects as well.

Credit managers should also delve more deeply into knowing their customers, particularly smaller contractors on large projects, to determine if they have proper licenses, the experience paying taxes for such projects and the know-how to hire other subcontractors, he said. “Know the project itself, the general contractor, who’s financing it. Information is the most valuable commodity a trade creditor can have, especially when you get into these big-dollar projects.”

– Nicholas Stern, editorial associate

Housing Starts Expand Rapidly in December as Building Permits Increase Modestly

Jan. 19, 2017

Starts for privately owned housing jumped 11.3% in December 2016 to a seasonally adjusted annual rate of 1.23 million, according to the latest data from the U.S. Commerce Department. Starts for these units were 5.7% higher than in December 2015.

Single-family housing starts, however, fell 4.0% in December 2016 over the prior month to a rate of 795,000, though the overall rate of starts at 1.17 million was 4.9% higher than a year prior, thanks in part to 16% growth in the volatile multifamily component, said Wells Fargo Senior Economist Mark Vitner.  “Although the strong reading is welcome, the level of starts looks to be a bit exaggerated, especially as we are in the seasonally slow period of the year and swings in the data due to the seasonal adjustment process and weather distortions play a larger role in the headline reading,” he said.

Meanwhile, on a monthly basis in December 2016, building permits for privately owned housing units fell 0.2% to a seasonally adjusted annual rate of 1.21 million, though the rate is still 0.7% higher than a year prior. Single-family building permits, on the other hand, climbed 4.7% in December to a rate of 817,000. Overall, permits for 2016 increased 1.9% from a year prior.

“With December now in the books, we see that the annual average for permits is running ahead of starts, pointing to a pickup in activity in the coming year,” Vitner said. “In previous publications, we have written about the shift in construction toward less-expensive homes, which is a welcome sign following the dearth of activity in the lower-priced home segment as many investors converted units into rentals. We suspect some of this activity will cool as the recent spike in mortgage rates following the election curtails overall activity.”

On the multifamily front, with lending standards tightening and apartment rent growth moderating, Wells analysts expect to see the pace of multifamily building to cool this year.

“Looking ahead, the underlying fundamentals and still-rising credit availability suggest starts have more room to run,” Vitner said. “We expect starts to average a 1.17-million-unit pace in 2017 and 1.22-million-unit rate in 2018.”

Housing completions fell significantly in December 2016 from the prior month, dropping 7.9% to a rate of 1.12 million, though still remaining 5.7% above the prior December’s figure, Commerce said.

– Nicholas Stern, editorial associate

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