How's business? Home improvement company owners ask one another that question a lot these days. The answer depends on several things: What you sell. Whose product you sell. How much you sell it for. And where you're located.

Jeff Head, owner of Head's Construction, in Evansville, Ind., is one of the few company owners who saw sales increase in 2008. Luck played a part in it. Being mostly a roofing company and well-known in the area, he saw an influx of business when Hurricane Ike blew through.

But in 2008, most home improvement company owners seldom found themselves favored by circumstance. Most were looking at balance sheets that showed sales stuck or moving backward. “Flatline is the new growth,” quipped Larry Judson, president of K-Designers, the country's largest siding installer.

Many company owners remember the silence after Sept. 11, 2001. What makes this recession different, says Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, is that then you had “a good, strong housing market that filtered down to a good, healthy remodeling market.” Baker says that economists who track the industry would “have to go back to the early '90s to find a period that looked like this in terms of the severity of the downturn.”

How severe is it? Housing starts are way off from their 2006 high point. More importantly for the home improvement industry, so are existing home sales. Just before year's end, the National Association of Realtors projected existing home sales of 5.02 million, down 11.2% from 2007, and way down from their peak of 7.08 million in 2005.

The good news: The Financial Forecast Center projects that housing starts will begin to trend up in March, after a long fall from their high point in 2006. And NAR spokesman Walter Molony says that the group projects 5.32 million existing home sales for 2009, which is a 6% increase. That matters because when houses change hands, improvements happen.

In a healthy housing market, home values increase year to year and improvements help make the house worth more. Declining equity — home prices are down 23% from their peak — gives owners less incentive to improve. Of course, that doesn't mean there aren't buyers. “Obviously, equity has shrunk, but there are people out there pulling the trigger,” notes Ross Marzarella, vice president of operations at All County Exteriors, in Lakewood, N.J., whose company, believing fortune favors the bold, doubled its advertising this year.

One last factor, and not a small one, is credit. Many home improvement companies sell financing to pay for projects, and that financing is becoming increasingly difficult to find. Lloyd Gillman, president of The Window Guys, in Chicago, says that in 2008 his company's credit rejects went from 16% to 21%. “Our turn-downs are now in double digits,” says David Goodman, vice president of Windowizards, in Bristol, Pa.

All this helps explain what retail analysts call a mood of “extreme caution” in consumer spending. “Everybody is thinking about being a little or a lot more frugal,” says Doug Cook, owner of Feldco, a Chicago window company. “And they're doing things for needs purposes rather than wants.”

ROOFING: NEED TRUMPS ALL Roofing is the biggest category of exterior home improvement. Long term, that is, to 2012, demand for it will grow 2% per year, to $15 billion, according to The Freedonia Group, in Cleveland. The majority of that demand is for re-roofing, and asphalt shingles are and will remain the most popular roofing material.

For the moment, though, if you're in the home improvement industry in 2009, roofing of any kind would be as good a product as any to sell. Because at some point people have to have it. A 2008 study showed that of 4,000 categories in the Yellow Pages, “roofing contractor” is the 30th most frequently referenced. “When your roof goes, you really don't have a lot of options,” says Bill Good, vice president of the National Roofing Contractors Association, in Des Plaines, Ill. But in an economic recession, some companies do, in fact, offer options to make a re-roof affordable. In hard-hit Michigan, Kearns Brothers, of Dearborn, has worked with cash-strapped homeowners by replacing half a roof, and agreeing to come back later.

Good calls the 2008 residential roofing market “soft” and says that has driven some residential companies to seek commercial work. A good example is County Wide Exteriors. At the end of 2007 the company made a strategic decision to increase its residential replacement business, the majority of which is roofing but also includes siding, windows and doors, sunrooms, and commercial renovations. Marzarella says that in addition to doubling his ad budget, he hired a new sales manager, which has helped to increase conversion rates on inbound calls from 27% to 38%.

County Wide Exteriors also aggressively sought out commercial property owners and managers — the kind of people who have “been putting reserves away for 10 or 15 years. It's not like they have to get a home equity loan or check their 401(k) to see if they can do this project,” Marzarella says.

Many roofing companies would like that kind of work, Marzarella says, but to get it you need “a laundry list of projects you've done of this magnitude” plus the financial wherewithal to “hang these projects out there for six months to a year.”

Landing a contract to re-roof the Ritz-Carlton in Baltimore helped lift the sales of S&K Roofing, Siding and Windows by 10%, owner Don Katzenberger estimates. In 2008, the Eldersburg, Md., company also dug deep in its database of 20,000 previous customers to sell attic insulation jobs and a minimum of one new deck per week. Helping homeowners push back energy costs lifted repeat/referral from 79% of sales in 2007 to 83% in 2008.

Roofing companies coupled the search for niche business with finding ways to drive overhead down. Costing and inventory control top the list. S&K Roofing, Siding and Windows saved itself $60,000 by switching insurers to get sales reps re-classified under workers' comp.

“When things are going gangbusters, you don't keep as sharp an eye as you should on what's going out,” says John Dunbar, sales manager at Jancewicz & Son, a roofing company in Bellows Falls, Vt. Jancewicz installed new estimating software that standardized labor and material costs on jobs, hired someone to manage its four-building warehouse complex, and, beginning in early 2007, instituted weekly reports from all department managers. Sales in 2008 are down, but accountability, Dunbar says, made a big — as in double — gross profit difference. So did added attention to customer communication. “If there's less work to go around, people are going to be a little pickier about what they expect.”