January 19/26, 2015; Volume 28/Number 15
By K.J. Quinn
The recovery for the builder business is finally under way, industry watchers say, as key economic indicators are pointing in the right direction. The AIA Billing Index, multi-family housing starts, single-family new construction forecasts and other economic reports all provide cause for optimism.
“This typically bodes well for the flooring industry,” said Randy Merritt, president, Shaw Industries. “We do expect 2015 to be a better year in almost every category.”
Leading the recovery will be single-family homes, a reversal of 2014 when multi-family homes grew at a much faster rate. Low mortgage rates, affordable home prices and pent-up demand are projected to keep single-family production moving forward into 2015. If these projections hold water, it will also be a sign U.S. consumers have confidence in a sustained recovery of the economy.
“One factor in single family that stands out is our inability to get the first-time homebuyer re-engaged in a meaningful way,” said Jay Smith, president, FEI Group, a national network of flooring, cabinetry and countertop contractors. “We are very hopeful that some of the recent mortgage regulation/tweaks can be beneficial in bringing the first-time homebuyer back into the market for single-family homes.”
The builder market is significant to the flooring industry, as approximately one-third of total flooring sales are generated from this segment, and a similar percentage of dealers service this business. While the U.S. Census Bureau reports privately owned housing starts declined nearly 3% in October, building permits rose almost 5%, an indication that developers continue hedging their bets on multi-family homes. Permits for buildings with five or more units rose 8% above September’s level to 406,000, according to The Census Bureau.
“In multi-family new construction there is an industry trend toward using LVP (luxury vinyl plank), not only for the realistic hardwood and stone designs, but for performance, installation and reparability,” said Chris King, vice president, residential sales, AFP at Armstrong World Industries.
The National Association of Home Builders (NAHB) recently provided further evidence that the market for multi-family homes will maintain growth into 2015; the association reported builder and developer sentiment about improving conditions in the apartment and condominium market were on the upswing for the 11th consecutive quarter. “We continue to see growth in all areas of the market: single family, condos and custom homes,” said Lisa Cunningham, design center manager, J.R. McDade, Phoenix. “Due to the shortage of homes over the past few years, there is now a high demand. And as the price of resale homes increases, the value of a new home becomes more apparent to prospective buyers.”
The new residential construction data, however, can be skewed somewhat by regions that enjoyed growth well beyond the numbers. For example, Texas, the Carolinas, Florida, Southern California and parts of Arizona were among the hottest builder markets in 2014. Case in point: Floors Inc., a major flooring dealer which services four major Texas cities, reported its builder business grew 17% over 2013.
“We operate in a robust home builder market,” said Larry Barr, president and CEO. “Texas leads the nation for job growth during the last several years. With more big companies relocating to Texas, there is a pent-up demand for new housing.”
Great Floors in Coeur d’Alene, Idaho, reported a similar increase through November 2014. “Most of the increase came from our long-standing builder accounts that simply built and sold more units [in 2014],” noted Ken Chadderdon, vice president of purchasing. “We also picked up some higher-end builder business in the Seattle metro market, a place we have not had much success in years prior.”
While some industry executives are optimistic about a housing market recovery in 2015, others are not so sure. “I don’t see the housing market growing much faster than [2014],” said Donato Grosser, president, D. Grosser & Associates, a New York-based market consulting firm. “Everyone says there is going to be a need for housing in the future. But young people looking to buy houses may not have the money to do it because the prices are too high.”
Others point out the builder business appeared to be poised for solid growth in early 2014 as economic conditions improved but fell short of the mark. “The builder market was up, but fell short of what we experienced in 2013,” said David Holt, Mohawk’s senior vice president of builder/multi-family. “The number of starts did not meet the industry’s forecast, which can be attributed to economic unrest. The high end did very well while the middle of the road played scared.”
One trend expected to continue into the new year is the movement toward larger home designs. The latest figures from The Census Bureau indicate the average size of a completed single-family home reached a high-water mark of nearly 2,600 square feet in 2013. Over the last 40 years, the average home size has increased by more than 1,000 square feet.
Impact on flooring selection
As homes become larger, flooring choices for specific areas will be impacted, in part by how each space is being used. For example, the living room is expected to merge with other spaces in the home, while the dining room is projected to decrease in floor area. Carpet is expected to remain a go-to product for these spaces in the average single-family home, although hard surfaces are growing at a much faster rate and increasing their share of coverage.
“Hard surfaces are increasing in market share overall,” Shaw’s Merritt confirmed. “But carpet continues to comprise a majority of the market.”
Flooring preferences vary by region, but sales of hardwood, ceramic, laminate and resilient are trending up in new home sales nationwide, industry experts explained. “Wood enjoyed the largest increase, followed by ceramic wood visuals, while resilient was down,” Holt said. “The dark horse was laminate. The visuals, ease of installation and lack of claims have and will continue to drive laminate in builder.”
Most flooring upgrades are being allocated for kitchens and baths, observers said, because both areas offer the greatest return on investment based on time spent in the home. Homebuyers still desire higher-end products such as ceramic tile and hardwood, which studies indicate add value to the home. “We see carpet in the segment as down a point or two overall,” FEI Group’s Smith noted. “This is due to hard surface gaining share in the home.”
Upgrades for these higher-priced products are reportedly becoming more prevalent, given looser loan standards, which, in part, have given homebuyers the ability to to secure additional financing for upgrades. “Hardwood is preferred over soft surface, especially in the living areas of the home, such as dining, living and family rooms, and even kitchens,” Armstrong’s King said. “Builders can drive upgrades with design—from on-trend colors and wider widths to surface treatments such as textures, hand scrapes, etc.”
Upgrading new homebuyers to better quality flooring is considered an integral part of the builder business. The profit margins are considerably higher than base-grade products. “As long as the builder allows, we always entertain the opportunity to upgrade customers,” Chadderdon said. “It is much easier when our builder account offers its homebuyer the option to ‘roll’ the upgrade cost into the price of the home so upgrades can be financed.”
Builders benefit from upgrades as dealers will often share some of the profits from the sale, and this incentive has proven to be quite lucrative. For example, Chadderdon said, “This past year we had a major builder account who sold only at their model homes. But we have proven to be much better than a realtor in upgrading homebuyers. They now require every homebuyer to meet with our salesperson for color selections because we upgrade over 70% of the time whereas their realtor [upgrades] less than 10% [of the time].”
Builder dealers cite the importance of educating new homebuyers about the features and benefits of various types of flooring so they can make informed purchasing decisions. This helps ensure new homebuyers receive a visually appealing, high performing product that meets their expectations. “We are seeing more builders use design centers every day, particularly for the step-up market,” Barr said.