Deferral, then bounce: taking stock of H2 2023 kitchen and bath industry conditions

Todd Tomalak
Principal, Advisory of Building Products for Zonda

Todd Tomalak, Principal, Advisory of Building Products for Zonda, is a frequent NKBA contributor (NKBA is a strategic partner of Lyrical Communications based in the US). Tom has a monthly column for CEO Corner. He has also appeared on several of the association’s panels at events focusing on key trends and economic insights in the US.

Deferral, then bounce. That appears to be the backdrop unfolding for the kitchen and bath industry over the next 18 months. A setup for potential whipsaw in activity.

Near term: The industry is slowing
After a surge in home improvement and housing spending 2020-22, kitchen and bath spending is slowing. In part because it’s getting harder for homeowners to fund the projects than before. Homeowners have record equity in their homes, but payments from HELOC/second mortgages cost about 31 percent more today than the same time last year.

The impact to K&B is meaningful: Cash-out/ second mortgage volume is down about 67 percent (trailing 12 months), which according to our research should normally slow kitchen remodeling by about 13 percent.
Kitchen remodels are the second most sensitive remodel category to slowdowns in cash-out volume. Baths perform a bit better (-7 percent), which makes us think that we may see a near-term shift to more bath projects and fewer kitchen projects.
Real incomes are also declining. We have been warning clients that risks appear to get marginally worse in the second half of 2023, before getting better. Backlogs softened rapidly in Q1, and appear to have stabilized in spring. Now we are getting more cautious about the remainder of the year.

Medium-Term: A Setup for Deferral and Bounce
After reviewing the housing data, we are left with the distinct impression that future remodels are pent-up and festering. That is: When the industry stabilizes (and rates come down even a nudge), we will see a wave of pent-up remodels occur in kitchen and bath that is larger than what we have seen in several decades.

Hints of this pent-up demand are already showing up in various parts of the market – here are just a few:

  1. Two times more homeowners plan to move ASAP (less than 2 years) vs 2021 – This is an indication of dissatisfaction with their current homes. For now, higher mortgage rates are holding homeowners in place. Once mortgage rates become modestly lower, the scale of moves could be surprisingly high. (If homeowners actually move as they say they plan to do, the scale is significant: nearly +150 basis points higher mobility rates, equivalent to +2 million extra future existing home sales.) Bear in mind that about one-third of these moves will lead to extra spending on K&B remodels.
  2. Mini ‘Baby-Boom’ among college-educated women 35+ – While the overall birth rate has been declining since 2007, birth rates are surging among households in prime kitchen and bath spending cohorts. According to data from the Bureau of Economic Analysis, having a child increases spending on housing +34 percent vs non-child couples, and Zonda and Census data suggest the dollars are skewed towards kitchen and bath. Most importantly: None of that spending lift was ‘pull forward’ during COVID.
  3. Pipeline of planned kitchen remodels: Consumers who face income losses tell us they are more likely to ‘defer’ to get exactly what they want – Zonda conducted primary research on the ‘pipeline’ of homeowners actively planning remodels, and discovered something special about kitchen remodels. What we learned: If homeowners get hit with surprise income losses, they are much more likely to ‘postpone’ the project until later (rather than cancel outright). Of the project categories Zonda tracks, kitchen remodels ranked number one in ‘defer’ vs ‘cancel.’ The kitchen is the center of the home, and those outdated features tend to fester. Homeowners’ ability to pay may be delayed, but the desire to remodel is much more sticky than other project types.

What It Means: Deferral, Then Bounce
Buckle up. That’s the story unfolding for the kitchen and bath industry over the next 18 months. We believe the industry could be set up for what may be remembered as ‘The Golden Decade of Remodeling,’ but with a cyclical slowdown in the middle. We are at the slowdown now, and are watching the pace of rebound with interest.

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