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It's official, the housing market is in a slump.

With a record number of homes on the market, mortgage rates rising and an affordable-housing shortage, many families are deciding to stay put. Sales plunged more than 4% between June and July, with a drop of at least 10% predicted for the year.

Builders of new homes are among those feeling the pain.

Pulte Homes (PHM) - Get Free Report, the nation's biggest homebuilder, announced it doesn't expect to meet its third-quarter earnings forecast, and lowered its forecast for the year.

KB Home

(KBH) - Get Free Report

recently sold its 49% stake in land for the Anaverde development in Antelope Valley, Calif., citing current market conditions. And in August,

Toll Brothers

(TOL) - Get Free Report

, a luxury-home builder, blamed the slowdown for its 19% decline in quarterly profits.

When the housing market loses its momentum, sprucing up or enlarging existing homes has more appeal than moving to a new place.

A room addition, a revamped kitchen or an upgraded bathroom can make a home more livable, and even boost its resale value once the housing market springs back to life.

It's easy to spend hours poring over decorating magazines, catalogs and color swatches to find the styles and materials that will morph the old homestead into a dream house. But the key decision in any home-improvement project is finding an honest, reliable contractor.

In 2005, the national average price for a midrange kitchen remodeling was close to $44,000, with an upscale job costing more than $81,000. The price can soar even higher if a contractor does shoddy work, goes bankrupt or simply skips out after cashing your first payment check.

Plus, you'll be sharing living space -- and your dreams for your home -- with this person, so it's important to do your homework even before seeking an estimate. Taking the time to find the right contractor can help the project more run smoothly from start to finish.

Assessing the Terrority

Start with an extensive list of contractors, as some will be out of the running before you choose at least three to bid on the job.

Word of mouth is one of the best ways to gather names: ask neighbors, friends and relatives who've had work done lately if they're pleased with the job and willing to recommend their contractor.

Local lumberyards and building material suppliers always have contacts in the remodeling business. Ask for names of contractors who buy high-quality materials and pay their bills on time, a good indicator of solvency.

Building inspectors, too, can make referrals. They have firsthand insight about the level of a contractor's work, as the inspectors must certify that jobs pass code requirements.

Further, professional associations such as the

National Association of the Remodeling Industry,

National Kitchen and Bath Association,

Associated General Contractors of America and the

National Association of Home Builders all have information about member contractors nationwide.

Narrowing the Field

Next, prepare a list of questions and call the contractors who received top marks from your sources.

Ask how long the company has been in business, if it has experience with projects of your type and size and if it will be available when you want the job to begin.

Make sure the contractor is willing to provide financial references from suppliers and banks and a list of previous clients, as well as current proof of license, liability insurance and workers' comp coverage.

Find out who will do the actual work -- the contactor's own employees or subcontractors -- and how many jobs the contractor has in the works simultaneously. Inquire about membership in any professional organizations.

Also, get the street address for the business and the office phone number. Drive by to verify that an office exists -- it's not a good sign if a contractor has only a post office box and a cell phone. Someone with a more established presence has a reputation to protect, and will be easier to find.

Laying the Foundation

Once you've narrowed the field through phone interviews, set up appointments to meet with the best of the remaining contenders.

Be wary if a contractor is too busy to meet with you or seems rushed during your time together. If contractors can't squeeze you into their schedules when they're hoping to land you as a client, they're not likely to have time for you if problems arise or if you want to talk about the job's progress.

Come prepared with questions related to your project.

Ask how long the job will take, how much your household routine will be disturbed, if the water or power will be shut off and if you'll have advance notice of when to expect disturbances.

For a major job requiring replacing a roof or walls, find out how your family and possessions will be protected, or if you'll even be able to live in the house for the duration of the construction.

Pay attention to the contractor's attitude throughout the interview.

Communication is key -- it's important to choose someone who listens to you, answers questions to your satisfaction and takes your concerns seriously. Someone who's impatient, defensive or dismissive is not likely to behave any differently midproject.

Finally, ask the contractor for references from homeowners he's worked for, names of subcontractors, and for addresses of current projects that you can drive by.

When checking these references, ask the former client how he or she found the contractor, how long ago the job was done and if he or she is satisfied with the quality and durability of work.

Find out if the contractor was reliable, honest and whether the client would hire him again. Try to get a sense of what the contractor was like to deal with, if crew members seemed skilled and were easy to communicate with. If there were any delays or problems, what was the cause and how were they resolved?

If you're satisfied with the answers, ask if you can drop by to take a look at the work. While you're at it, visit an in-progress job site; see if it seems organized and safe, and if the contractor's equipment is in good condition.

Check with the state contractors board or licensing board to make sure the contractor is licensed.

Finally, call the Better Business Bureau, your local consumer protection agency, local building department, trade association and construction unions to see if any complaints have been filed against the contractor, and how they were resolved.

The Final Step

Getting at least three written estimates is a good rule of thumb.

Supply the same job information to each bidder, including accurate plans or drawings, specifications and materials. Ask each contractor to break down the totals to show charges for materials, labor, profit margin and other expenses.

Once you receive the bids, throw out any that seem too low, which can mean that the contractor may not understand the scope of the job, has overlooked some important steps, or intends to cut corners.

Go over the bid with the contractor, asking about anything you don't understand, and question variations in price between the bids.

Once all your queries have been answered to your satisfaction, you should be ready to make your choice. Keep in mind that you don't have to go with the lowest bidder, if he's not No. 1 in communication, reliability, craftsmanship and other factors that are important to you.

If you think finding a contractor sounds like a lot of work, you're right. But taking your time to find the right person can keep your dream project from turning into a nightmare.

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Elzy Kolb is a freelance writer living in White Plains, N.Y. In addition to writing the monthly JazzWomen! column in Hot House magazine, her articles on the arts, travel, interior design and other topics have appeared in the New York Times, Interior Design magazine and The Stamford Advocate.