Remodeling Creating Order Out of Chaos “ Meet The Industry “ Mark Richardson, CR President, Case Design/Remodeling & Case Handyman® Services MRichardson@casedesign.com - (301) 229-4600

Agenda The Remodeling Environment The Remodeling Industry The Remodeler Future Remodeling Issues Q and A

And the Numbers Keep Growing… Overall Industry Expenditures The remodeling market has seen tremendous growth. In 1980 it stood at $43B, by 1990 it had hit $115B, by 2001 it had surpassed $200B. The Joint Center for Housing Studies, Harvard University projects home improvement expenditures reached $256B in 2004. Source: Joint Center for Housing Studies Harvard University, U.S. Census Bureau, NAHB *Denotes forecast

Remodeling Industry Compares Favorably in Size to Other Better Studied Industries Units: Total market size Home improvements and repairs Commercial construction Clothing store sales Legal services Nonbuilding and public works construction GDP-Greece Remodeling is a HUGE market. It compares favorably in size to other industries…. And the GDP of Greece Source: Joint Center tabulations of American Housing Survey, U.S. Department of Commerce and OECD

Existing Home Sales on the Rise Millions Existing home sales are also a big driver of remodeling. Existing home sales are tracked by the National Association of Realtors. As you can see from this chart, existing home sales have been accelerating in recent years. In 1999 they hit 5M for the first time and only four years later in 2003 they hit 6M for the first time. Thru April 2004 the NAR announced existing home sales were selling at an adjusted annualized rate of 6.8M units. Avg Sales prices of existing homes also continue to rise. The avg sales price in Dec ‘03 was at $173,200, up 6.6% from Dec of 2002. The national median existing home price thru April ’04 was $176,000, up 7.3% from April ’03. This is also good for remodeling growth as owners of existing homes continue to increase the equity they have. Thru April ’04, the current inventory of existing homes on the market for sale is 2.57M units, which represents a 4.6 month supply. This historically low inventory level of existing homes for sale is also good news. Source: National Association of Realtors, 2005 adjusted annual rate thru April 2005

Home Sales Forecast Average Annual, $ Millions LOW HIGH ESTIMATE ESTIMATE 1994 – 2003 FORECAST 2004 – 2013 New Home Sales 0.85 0.97 1.13 Existing Home Sales 5.52 7.10 7.50 Manufactured Homes 0.28 0.20 0.22 Total Home Sales 6.67 8.27 8.85

Improvement Spending Increases with Age of Home Average annual spending $1,000 $1,200 $1,400 $1,600 $1,800 0-4 5-9 14-10 15-19 20-24 25-29 30-39 40-49 Over 50 Another key element of remodeling expenditures is the $’s spent by age of home. As you can see from this chart, peak spending levels occur when a home reaches 20-30 years of age. What homes today were built 20 – 30 years ago?? Answer: Homes built in the decade of the 1970’s Consider this, the largest new homebuilding decade in history was from 1970 – 1979 when 21.3 million new homes were built. All of those homes are now hitting the 20-30 year age and hence are reaching peak years for remodeling. Source: Joint Center tabulations of the 1997 American Housing Survey

Growth in Home Ownership Homeownership rates reach all-time record Percent 70.0% in 2113 68.3% in 2003 Homeownership rates have soared to all-time record levels at stood at over 68.3% the end of 2003. The current projection is that they will reach 70% by 2013. While homeownership among “whites”is around 80%, it is significantly lower for minorities. But over the past five years minorities represent 40% of all new homeowners. More minority homeowners are a key driver in the increasing home ownership rate. Source: U.S. Census Bureau, Home Ownership Alliance

Low Mortgage Rates Have Spurred Refinancing 2003 $2.4 Trillion 71.4% increase from 2002 Trillions of 2001 dollars After record levels of refinancing in 2002, levels surged an astounding 71% in 2003 to $2.3T. A large # of homeowners took cash-out equity when they refinanced their homes. And what did they do with this cash? Source: Mortgage Bankers Association

Home Improvements Largest Share of Proceeds from Refinancing Share of dollars from refinancing, 2001 – 2002 Home improvements Debt repayment Financial investments Consumer expenditures Real estate / business investments Taxes 2% 35% 26% 16% 11% 10% But when you look at where the percentage of total $’s taken out during refinances went, you’ll see that home improvements was the #1 area with 35% of all $’s. And how much was that?

% of Remodeling Expenditures Increasing at High-End Market Percent of Total Spending Homeowner Income Home Value 1995 Share 2003 Share Note: Owner income and home value have been adjusted for inflation Source: JCHS tabulations of 1995 and 2003 AHS, Harvard University Joint Center for Housing Studies

Top Ten Remodeling Markets Average annual home improvement spending – billions of dollars San Francisco $2.6 Los Angeles $4.3 Minneapolis $0.9 Chicago $2.8 Detroit $1.9 Philadelphia $2.3 New York $6.2 Miami Washington $2.0 Boston $1.4 There’s nothing surprising about this chart which reflects the top ten markets for remodeling expenditures. Seven of the top ten markets are in the Northeast and Midwest states. The prime reason all of these markets reside in the top ten is the hold the largest stocks of existing homes. Source: Harvard Joint Center Tabulations of American Housing Surveys

Future Top Remodeling Markets Share of owner-occupied homes built 1970 – 1979 Salt Lake City 24% Denver 29% San Diego 29% Phoenix 30% San Antonio 27% Houston 38% Atlanta 25% Orlando 28% Tampa 33% Miami 31% While the Northeast and Midwest markets will continue to remain strong for remodeling, we see some of the strongest growth coming in the Southern states which have been the the strongest for new construction for many years. A number of slides back we showed that the peak age for home improvement spending was when home reached 20 – 30 years of age. We also noted that home reaching that age now were built in the decade of the 70’s. And what areas of the country did we see more of those 70’s homes built than anywhere else? In the Southeast and Southwest. For instance: 38% of ALL existing homes in Houston were built in the 70’s 33% of ALL existing homes in Tampa were built in the 70’s 31% of ALL existing homes in Miami were built in the 70’s……… And all of these homes are reaching 20 to 30 years of age! Peak years for home improvement spending. Another interesting piece of news is that of the record 6.1M existing home sales in 2003, the region with the biggest year over year increase was the Southeast! Source: Harvard Joint Center Tabulations of American Housing Surveys

Who’s Doing the Work? 816,700 individual remodeling businesses 645,200 Self-Employed Professionals 171,500 Firms With Payroll and 50% of Work in Remodeling Census Tabulations by Joint Center for Housing Studies of Harvard University, 2001

Remodeling Segmentation The 62,405 GC remodeling firms are the key to most manufacturers. They account for the bulk of the business done by the total audience of GC firms of 220,000. Source: Harvard Joint Center Tabulations of the Census Construction Industries

Home Improvement Market Segments 2001 remodeling expenditures by type of job Maintenance Additions and alterations Major replacements 49% 30% 21% Remodeling is divided into three major categories: Additions & Alterations Major Replacements Maintenance & Repair In terms of total $’s, additions & alterations represent the largest segment followed by maintenance & repair, and major replacements. Source: NAHB Economics, based on U.S. Census Bureau

Remodeling Consolidation % of Total Market The 171,500 “core” remodeling firms can be further divided into two groups: Full-Service General Contracting Remodeling Firms – 62,405 Specialty Contractors – 109,139 These two types of firms really need to be looked at separately. They have different ways of going to market, handle different groups of project types, the avg. number of projects and the avg. price points of their projects differ substantially, and they often use different sources of supply. Source: Joint Center For Housing Studies, Harvard University

Key Business Structure Considerations Client demographics Specialty vs. Full Service Practice vs. Business (owner’s role) Showroom vs. In Home Sales In House Crews vs. Subcontracted Size/type of remodeling projects Lead generation methods (marketing vs. word of mouth) Size of business ( infrastructure / staff )

Residential Remodeling Business Specialty Full Service Other Business Size Windows Siding Roofing Kitchen Bath Basements Deck Gutters Glass Garage Doors Skylights Small Products Small Jobs HM Medium Jobs Traditional Larger Jobs D/B Insurance Restoration $250K to $750K X $750K to $2.5 mil $2.5 mil to $15 mil $15 mil and Above A Couple One A Few Franchising Examples Andersen Other Dream Maker Owens Corning Archideck Many Case Mr. HM House Dr. Others (Just launched) Paul Davis

The Remodeling Business Most companies have Evolved (not Designed) This is a very easy entry business 171,000 remodelers, less than 8 % in a national association About 60% fail within the first 5 years Top 500 have less than 3% of the market share 9 out of 10…honest and hardworking, but are not very fit businesses

How Do Remodelers Gauge Their Success? “I’m booked out 6 months.” “Most of my business comes from personal referrals.” “I’m working 60 – 80 hours a week.” “I just sold a big job.” “I increased my sales by 30% over last year.”

Working with the Remodelers Focus on the “relationship” not the “project” Understand the remodeler’s priorities and mold your product/service appropriately Know who the “buyer” is (not always obvious…salesperson ? vs. PM ?) Think long term not short term The remodeler determines the products used not the homeowner Support the remodeler’s causes Think strategic alliance not “customer”

Key Issues for The Future The Client Consolidation The influence of Technology Alliances Financing The labor force

MRichardson@casedesign.com - (301) 229-4600 Q & A Mark Richardson, CR President, Case Design/Remodeling & Case Handyman® Services MRichardson@casedesign.com - (301) 229-4600