Hitting Pause

July 12th, 2021 by Nathan Hobbs

Builders Flinch at Risk of Overinflated Market in 2019

By Drew Vass

The U.S. economy is an intricate web. And after watching a housing bubble bring the entire system to its knees (in 2008), it’s clear that every fiber—in one way or another—spans to housing.

“It’s consumers’ biggest purchase at the end of the day, so I think that if they are willing to buy houses, it really shows that they are confident,” says Danushka Skillington, associate vice president of forecasting and analysis for the National Association of Home Builders (NAHB). In recent months, indicators show that confidence waning.

After a two-year run averaging 68 or better, the NAHB/Wells Fargo Housing Market Index (HMI) showed builder confidence levels falling to 60 as of November. While any number above 50 is considered positive, it’s also a move in the direction of what analysts have predicted for 2019: a slower housing market.

That pattern is expected to remain over the next few years, as economic forces work themselves out, says Cris deRitis, Ph.D., senior director of economics for Moody’s Analytics. And the fact is, that could be a good thing, as builders showed no signs of caution heading into the last recession.

Those movements, “could be a sign that we have hit the wall and the economy is headed towards a mild recession,” says Dennis Berry, senior vice president of NHC Sales and CPM for The Empire Company and World Millwork Alliance president. “However, given the overall strength in other key attributes of the economy, it is perhaps just as likely that the pullback is a health-restoring correction to an overheated market.” As evidence for the latter, Berry points to the Federal Reserve’s index of Leading Economic Indicators (LEI). “Every recession since 1970 has been preceded by a downturn in the LEI,” he says. “Recent softness in housing data has weighed somewhat on the index, but seven of 10 components remained in positive territory as of September 2018.”

Nonetheless, while some retraction among builders could help to cool the prospects of another housing bubble or recession, that slower outlook has ripple effects for other areas, making the push and pull between housing and other segments of the economy an important dance—including with fenestration. “New construction has been and continues to be a major growth engine for the economy overall,” deRitis says, historically contributing close to 18 percent of the U.S.’s gross domestic product (GDP).

Affordability Remains Key

When taking other factors into account, such as unemployment rates in the 4 percent range and inflation that’s expected to remain in an acceptable zone around 2 percent, one could argue that the economy is sending mixed signals. For every positive, however, it seems that there’s a caveat these days. For instance, statistics show that while the job market is currently at a level designated as full employment, “The current unemployment rate risks being too low,” says Robert Dietz, Ph.D., chief economist and senior vice president for Economics and Housing Policy at NAHB. “Right now there are more open, unfilled jobs in the economy than there are unemployed persons to fill them.”

What’s worse? Dietz says that, while construction has faced shortages for years, the issue has spread to other areas of the economy. Under the circumstances, wages are expected to be driven higher through competition. And that you might expect to enable more homebuyers, but with interest rates creeping up and experts saying they expect them to climb to more than 5 percent in 2019, housing remains in an entrenched battle for affordability, which is currently at a 10-year low, according to NAHB. According to U.S. Census Bureau Statistics, prices among privately-held residential construction projects climbed on average by around $33,000 through third-quarter 2017, following a similar pattern held to the year prior. According to Skillington, housing prices now exceed the buying power of nearly half of all consumers. She says it’s not surprising that growth in housing is expected to slow significantly over the next two years. Adding to that problem, she says, is a lack of buying power among one key group: Millennials.

Builders Remain Key Target

Research conducted by DWM’s parent company shows that door and window manufacturers and dealers hold positive outlooks for 2019. So far as where they should aim their sales efforts, research conducted by Home Innovations Research Labs (HIRL) shows that builders remain the primary target. Data gathered from HIRL’s Annual Builder Practices Reports shows that when it comes to sales for doors and windows, it’s home builders making purchasing decisions 82 percent of the time. Meanwhile, 40 percent of those doors and windows are obtained from lumberyards. The exception is in entry doors, where nearly 45 percent are purchased by do-it-yourself homeowners.

Material Predictions

Vinyl Remains King

In terms of what materials builders seek these days, Home Innovations Research Labs’ (HIRL) Annual Builder Practices Reports shows that the migrations to fiberglass doors and vinyl windows is all but complete—especially among those building 50 or more houses per year, where vinyl windows hold down 81 percent. Among that same group, fiberglass doors hold down 65 percent of market share.

Of the eight million entry doors sold in 2017, fiberglass held the lion’s share, followed by steel raised panel. Heading into 2018, fiberglass was in a steep incline. Among new homes, HIRL’s data shows that builders also have migrated to fiberglass in areas other than front entry doors.

Playing Catchup

Information published by Dodge Data and Analytics shows that current 20 percent down payment requirements restrain demand among first-time home buyers, along with high student debt among the Millennial generation.

“They’re priced out, because they tend to live in urban areas,” Skillington says. “And most of [today’s gains in] employment and mobility is also happening in less affordable areas, too. There are so many tech jobs available and young people are moving to get them, but those areas are really expensive and therefore difficult to afford houses in.”

Eventually Millennials will come through on home purchases, Skillington and other experts say; exactly when, however, is unclear. In the meantime, their focus is expected to remain on rentals. According to information published by the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD), a slight uptick occurred in the absorption rate among multi-family rentals in 2018, following an increase in multifamily production over the course of three years. And while multi-family development is expected to slow in 2019, statistics show that there are still plenty of units to be rented. According to statistics provided by Home Innovation Research Labs, a wholly-owned subsidiary of NAHB, start statistics among the single-family starter segment have responded to those trends with a steady decline. With sales declining among single-family starter homes and average prices for those homes hovering around $187,000, indicators aren’t good for the strength of first-time homebuyers. But Skillington suggests that there may be an additional avenue for netting those potential buyers: townhomes.

“For Millennials, it’s a really good bridge between home ownership and renting,” she says. “Younger people want to live in urban villages. They want to walk to restaurants and to work.” For builders who face increased costs for construction and materials, she says townhomes are a win-win. “It’s a smaller footprint,” she says. “It’s going to cost less to build.”

Other data indicate that Millennials and Gen X buyers are willing to down-size in other ways. According to a survey conducted in February 2018, 63 percent of Millennials and 53 percent of Gen X’ers said they would consider buying “tiny homes”—that is, homes less than 600 sq. ft. in size. Should those scenarios play out, the narrower and adjoined format of townhomes and smaller square footages of tiny homes would all but ensure that those generations produce fewer sales for doors and windows going forward. With or without those trends, however, deRitis says he sees demand for doors and windows used in new construction going more or less flat in 2019. But that doesn’t make the year a bust. He and other experts also say that remodeling is expected to fill in.

“The economic data suggests that homeowners who are unable to trade up, due to the lack of available homes for purchase, are choosing to remodel their existing homes instead,” deRitis says.

Information produced by The Home Depot offers a similar prediction. In one of the company’s recent earnings reports, “big-ticket” transactions (those costing more than $1,000) increased by 10.6 percent, which company officials say they’re expecting to continue. Meanwhile, according to the latest Builder Practices Survey (produced by Home Innovations Research Lab), among the estimated 58 million window units sold in 2017, 38.5 million were sold in the remodeling/replacement market.

Uncertainty Engulfs Tariffs Heading into 2019

The recent trade wars between the U.S. and China aren’t new. (In fact, they date back to at least 2010.) But in March 2018, the current administration announced that it would employ Section 232 of the Trade Expansion Act (passed in 1962, allowing tariffs to be imposed by a president when imports are deemed damaging to national security), imposing tariffs on aluminum and steel imports of 10 and 25 percent, respectively. Shortly there-after, Canada slapped retaliatory tariffs on U.S.-produced steel and aluminum, and a host of other products, including a 10-percent surcharge on aluminum doors, door thresholds and windows.

Most notably, as of September 24, 2018, the U.S. imposed a 10 percent tariff on more than $200 billion worth of goods imported from China.

Products affected include:
• Stainless steel, doors, windows and their frames, and thresholds for doors;
• Iron or steel (other than stainless), doors, windows and their frames, and thresholds for doors;
• Wooden windows, French windows and their frames;
• French doors of wood;
• Doors of wood, other than French doors; and
• Leaded glass windows and the like; multicellular or foam glass in blocks, panels, plates, shells or similar forms.

Direct Impacts

“Tariffs on aluminum and steel imports or exports could impact all fenestration industry companies to varying degrees, since these materials are used in numerous components as well as manufacturing machinery,” says American Architectural Manufacturers Association executive vice president Janice Yglesias.

Meanwhile, a representative for the Window and Door Manufacturers Association told DWM that tariffs would likely lead to price increases for the residential and commercial construction markets.

So far as a trade war with China is concerned, ultimately the argument keys in on two factors: an imbalance of import/export activities and accusations over an ongoing practice of intellectual property infringements by companies and individuals in China. The goal of such tariffs is to level the U.S.’s trade balance, but whether or not that happens, is yet to be seen. Reaching a zero-sum goal could take a very long time, some analysts suggest.

Hold Tight

How long will it last? Some experts say it could be as little as one to two years.

“Despite these significant caution flags, there is hope for at least a limited decline both in depth and duration,” Berry says.

Meanwhile, with or without a draw-back, it’s important to remember that even with expected declines, fore-casts provided by Home Innovation Research Labs show that through 2022, at least, the future is bright for residential construction—including increases in single-family starts across all U.S. regions ranging from 2-5 percent.

“Once we work through the current round of issues, there should be a light at the end of the tunnel, with steady pickups in construction,” deRitis says.

The mere fact we are discussing a possible pull back, “should at least cause us to be more observant of the signs and how it may affect each of our respective businesses,” Berry concludes. In other words, no one should write off the year, but every construction-dependent industry should proceed with the right strategy and some caution in tow.

Drew Vass is the editor of DWM magazine.

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