In real estate, nesting is the new flipping

If flippers were the poster children of the real estate boom, then nesters are becoming the icons of the new housing market.

"We saw a nesting reaction after 9/11, but we're seeing a stronger nesting reaction now," said Bob Peterson, president of ABD Design/Build in Ft. Collins Colo. People who have the money are fixing up what they have."

A proportionally bigger share of the home construction dollar -- 20% more during the first three quarters of 2009 compared with the same period last year -- now goes to home improvements, according to the U.S. Census Bureau. In October, remodeling spending increased 8.7% compared with September to an annualized rate of $114 billion.

Jeff Hunt, vice president of Houston-based Brothers Strong remodelers, said that after a long slow period starting early last fall, his business took off. "About Aug. 1, all the stuff in our pipeline broke loose all at once, and since then we've been so busy we can't see straight."

Most of his projects are for nesters planning to stay. "Many people consider buying to get more space but when they look at all the costs they figure it makes sense to stay put," said Hunt. "They say, "I like my house, my neighbors, the schools.' Of course they do. That's why they bought the house in the first place."

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All many want is more space. Like Kim and Sandy Sobieski, clients of Hunt in Cat Spring, about 50 miles west of Houston.

The semi-retired title company exec and his wife have plenty of room to expand, and they love their land. "We have 65 acres and we didn't want to give that up just to buy a bigger house," said Kim Sobieski.

Hunt's company converted Sobieski's garage to an entertainment room and finished out its second floor. He also built a new garage and updated the kitchen, doubling its size. The job, which included a new roof, cost about $300,000 and added 1,500 square feet.

"It's very upscale, very nice," said Sobieski. "It's got a whole big room just dedicated to my wife's quilting."

Signs of life
Projects like the Sobieskis are happening all around the nation, helping to push the latest National Association of Home Builders' (NAHB) Remodeling Market Index higher during the last quarter.

Perhaps even more significant, NAHB's future index also jumped, indicating that home re-modeler confidence has strengthened. "The phones are ringing more," said Rose Quint, an economist with the NAHB. "That's led to a nice increase in the future indicator."

Both indexes, however, still languish below the 50 mark, the dividing line between optimism and pessimism. Contractors are seeing things improving, but they haven't made the leap to optimism, yet, perhaps because it's been hard to convert increased inquiries into actual work.

"Some remodelers are receiving more calls for bids, but it's still extremely difficult to close a sale," said Greg Miedema, a Tucson, Ariz.-based remodeler.

The industry may be slack because most buyers remodel when they purchase their new home, and home sales are down about 30% from their peak.

And there are fewer people who can afford to upgrade their existing homes. But those who can, "They say, 'If I'm going to stay here another five or 10 years, I'm going to have it the way I want,'" said Miedema.

The long run
And, in many areas of the country, it's more cost efficient to remodel than trade up. In northern Colorado, for example, many people long ago settled into their 20- to 50-year-old houses on the kind of large lots that are hard to find these days.

"Many of these houses are just are not as reasonably available anymore," said Peterson. "Figure in land acquisition and development costs and fees and you can see the expenses are driving people to remodel."

An added incentive spurring remodeling is the $1,500 federal tax credit for home improvements that raise energy efficiency. Jobs involving replacement windows and doors, heating and air conditioning systems, new roofs and adding insulation all can qualify.

Susan Marvin, president of Marvin Windows and Doors, said that the proportion of replacement windows her company sells versus windows for new home construction has flip-flopped.

"Our replacement window line has outperformed our line meant for the new construction market," she said. "Replacement window sales are up by double digits, and the new construction windows are down by double digits the past few years."

Tight credit
Nester-remodeling might be even stronger, according to Peterson, if home improvement loans were easier to come by.

"Financing is still very tough," he said. "Nearly all my clients are paying cash."

Perhaps because of that, more people are remodeling their homes in phases. Instead of one big remodel covering the kitchen, both baths and opening up the living space all at once, for example, they opt to do just the kitchen at first. Then next year, they may finish the job.

As a result, Peterson is getting more jobs, but the average job is much smaller. "Instead of 50 projects this year, we'll do 70 or 80," he said. "But the average price is down to $40,000."

Slow progress
Most industry observers agree that remodeling activity probably bottomed this year. Kermit Baker, chief economist for the American Institute of Architects and Senior Research Fellow at Harvard University's Joint Center for Housing Studies, doesn't think the home improvement industry will show substantially higher volume until early 2010.

Falling or weak home prices, near record levels of foreclosures, and other distressed sales are discouraging households from undertaking nonessential remodeling projects, he said.

"When home prices are declining, there's not as much opportunity -- or inclination -- to do that," said Baker.

He added that for remodeling to come fully back, home sales must come back strong.

"Nothing would help the industry more than a return to 6 to 7 million home sales a year," he said