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Tuesday, June 23, 2009

How to Become Your Own Economist - Reliably Predict Your Construction Or Remodeling Market

The national media would have us believe that the entire country is in a severe economic depression. Daily we hear reports about foreclosure rates, corporate bankruptcies, the banking crisis, Wall Street meltdowns, and on and on.

But for small construction and remodeling businesses, that reality couldn't be farther from the truth.

The reality is that small businesses operate in micro economies. In other words, what really matters is what is going on in your neck of the woods. 

Forecasting has long been a way to predict what will happen in the future by analyzing past data and looking for trends in that data. If you listen to the news media now, you'll hear a lot about economic forecasts. However, those reports focus on the country as a whole or even the world economy. 

So can forecasting work on a smaller scale, like your own marketplace? It absolutely can and I'm going to show you just three economic indicators to check each month that will help you predict the future for your remodeling or construction business. 

First, a little background. Residential remodeling activity is tied to new construction. Large remodeling projects tend to follow new construction activity. If new construction is up, so are large remodeling projects. If new construction is down, so goes large remodeling projects. One of the reasons is that large remodeling projects are tied to home equity (the normal means for financing large projects). And increasing home equity means that home values are increasing. 

However, when new construction is down, repair and replacement projects are up. Think about it. People don't want to invest a lot of money in their homes, but they certainly want to keep the value up.

But what fuels new home construction? Job growth is a major factor. And that makes a lot of sense. When new jobs are being created, more people move into a community. Those people require more housing. 

So how do you predict your own local remodeling or construction market? By looking at employment and housing trends in your market and watching how they change over time. 

What trends should you follow? First, local employment is significant. Find this data for your local area at the Bureau of Labor and Statistics. Laser down to the smallest metropolitan area that contains your market. And use the statistic for Total Nonfarm Wage and Salary Employment. This statistic will tell you whether employment is increasing or decreasing in your area.

Next, look at home sales in your area. Are they increasing or decreasing? This indicator will reveal much about your local housing market, such as the demand for homes and housing supply. If home sales are increasing, new construction tends to follow. Home sale data can be obtained from your local Board of Realtors. Do a Google search and laser down as far as you can to find data for your local market. 

Finally, a look at consumer sentiment will give you a sense of consumers' attitudes about the future economy. Unfortunately, there is no local data for consumer sentiment. But since most people face similar effects from housing and consumer goods prices whether they live in Maine or Arizona, the national consumer sentiment works just fine. When consumer sentiment is falling, as it has recently, consumers are not confident about the future and, therefore, tend to tighten their purse strings. Larger remodeling projects get put on hold. To track consumer sentiment, follow the Consumer Confidence Index.

By tracking the changes in just three easy-to-find economic indicators, you can get a very good idea of the future for your own remodeling or construction business. Set up an Excel spreadsheet and accompanying graph to track and visually analyze the changes in your indicators. Once set up, you will probably spend no more than 15 minutes each month gathering, entering and analyzing the data.

Forecasting is a very simple way to predict upcoming trends in your marketplace. Become your company's economic analyst and you will be able to make better decisions for your construction or remodeling company. 


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