State of the industry: Cautious optimism for builder market growth in 2016

Home Inside FCNews State of the industry: Cautious optimism for builder market growth in 2016

Jan 18/25; Volume 30/Number 15

By K.J. Quinn

Housing market analysts summed up 2015 as a roller coaster ride as a series of unexpected turns left builders and their suppliers feeling queasy. While the sector did not meet overly optimistic forecasts from earlier in the year, the latest home construction statistics indicate the bumpy ride might be over.

November housing starts rose 16.5% over the prior 12-month period, while building permits increased 11% from October and 19.5% over November 2014, according to the latest report from the U.S. Census Bureau. Single-family housing starts posted a 7.6% monthly gain. And while completions declined from October’s figure, they remain 9.2% higher than 2014.

“Nationally, the new home market is showing a steady level of growth that we expect will continue for some time,” said Lee Darnold, corporate vice president of operations at luxury home builder Toll Bros. “General macroeconomic conditions are driving starts, including the reduction in household formation during the downturn, the lower level of overall home sales versus the 30-year average, and continuing historically low interest rates.”

The single-family market should gain steam in 2016 with starts rising 17% to 805,000 units, according to Dodge Data & Analytics. Low-interest mortgage rates are expected to again play a part in demand. “The gap between new and existing home prices will remain relatively narrow as demand continues to outstrip supply, keeping new homes an attractive alternative,” said Anne Thompson, an economist at Dodge. “Move-up buyers who have regained equity in their homes will re-enter the market.”

Despite the encouraging news, the housing market remains a tale of two cities. While single-family permits increased over November 2014, multifamily permits reportedly skyrocketed during this time. And when you consider that multifamily projects take roughly a year to 18 months to build, the permit numbers provide evidence this sector will be robust in 2016.

“The primary reason why the single-family market is moving so slowly is it depends on existing home sales,” said David Crowe, chief economist at the National Association of Home Builders, (NAHB). “Most new homes are sold to current home owners.”

One of the issues affecting existing home sales is the lack of equity in ownership—driven, in part, by housing prices which plummeted during the recession but are now slowly recovering. “Some home owners may not have any equity, and even with a small amount may be reluctant to sell,” Crowe speculated. “They may have refinanced, so they have a really low mortgage.”

Household formation is again expected to top 1.5 million homes next year leading to strong demand for rental units, Dodge reports. Condominium demand is also expected to rise, both among those preferring the urban market and foreign investors. “The condo market is making a comeback, especially at the very high end, [such as in] New York City and Miami,” Thompson said. “The strength of multifamily demand has made financing for such projects more readily available.”

Trends impacting growth

Most prognosticators anticipate housing market conditions in 2016 to be similar to last year. Key economic indicators—such as lending and unemployment rates, plus housing starts—are trending in the right direction.

“The drivers are an overall improvement in the job [market] and the economic environment combined with pent-up demand,” said Jay Smith, president, FEI Group, a network of interior finish contractors and industry showrooms. “However, we are still not seeing the number of first-time homebuyers that the market needs.”

Millennials aged 31 to 36, a group comprising an estimated 25 million people, are expected to impact the housing market as well, Dodge reports. “These older millennials are paying off student [loan] debt and starting families, and this will put pressure on the existing and new home markets,” Thompson observed. “There is evidence that builders have started developing smaller homes to cater to the needs of young families and empty nesters.”

While industry members are bullish about the growth prospects, there are lingering concerns over mitigating factors which could take the wind out of housing sales. For instance, potential mortgage rate increases—the Federal Reserve recently raised lending rates for the first time in nearly a decade—and an additional wave of bank-owned foreclosures could slow sales.

“The continued shortage of skilled labor drives up house costs and ultimately sales pricing,” noted Char Kurihara, vice president of sales and marketing, corporate, at Dan Ryan Builders, Frederick, Md. “This ripple effect may cause potential buyers to revisit resale homes.” Land availability in high-growth markets is expected to affect longer-term growth prospects.

Indeed, the shortage of qualified labor remains a major concern among builders and their suppliers, especially if the new home construction business meets or exceeds growth forecasts. “We lost a lot of workers in the construction industry when the [economic] collapse occurred, and less than half of them came back to the industry,” NAHB’s Crowe pointed out. “Speed to market has been the biggest issue. Builders can’t move as fast because they have to wait for a crew to get to their project.”

As subcontractor and trade bases in tightening markets become stretched, pricing may be impacted and drive consumers to pause on some upgrade decisions in new homes. “Additionally, as manufacturer offerings grow with more styles, colors and materials, it might be harder for flooring companies to maintain stock of a rapidly increasing SKU count,” Toll Bros.’ Darnold said.

Changing floor preferences

The builder market is significant to the flooring industry, as approximately one-third of total sales are generated from this segment. While the market continues to recover from the recession, it remains fragile enough that any one or two negative impacts could offset flooring sales gains. For example, “if mortgage rates increase, the buyer may be forced to limit option purchases in order to still afford the home,” Dan Ryan Builders’ Kurihara said. “This could impact consumer ‘take rates’ of flooring options as well as force builders to remove standard flooring upgrades to reduce house costs.”

Most flooring upgrades are allocated for kitchens and baths, experts say, because both areas offer the greatest return on investment. “Large kitchens and open-concept design continue to be features buyers are interested in,” Kurihara said. “In such cases, it creates opportunity to sell upgrade flooring as there is no real separation of spaces.”

Flooring makers, for their part, are working to encourage sales of higher quality flooring. “We are offering better-looking visuals due to digital printing in all surfaces at competitive prices that were not achievable before,” stated David Holt, senior vice president, builder/multifamily, Mohawk Industries. “We are also trying to educate the builder on how much additional money they can make if they push hard toward upgrades.”

Builders and dealers cite the importance of educating new homebuyers about the features and benefits of various floor coverings, which encourages them to step up and buy. “We do see an increase in upgrade sales,” FEI Group’s Smith reports. “A robust, organized design center staffed by well-trained designers is still the primary path to homebuyers selecting better goods for their new home.”

Flooring preferences vary by region, as considerations such as budget, styling and value play a major role in determining which products are chosen for different areas inside the home. There are, however, trends which play a role in the increasing growth of certain soft and hard surfaces in new residential construction. For example, natural products, such as ceramic tile and hardwood, remain popular for their good looks, longevity and the value they add to the home.

“Consumer preference is clearly for increased use of wood and ceramic throughout the home,” Smith said. “We are even seeing luxury vinyl plank begin to make some inroads, particularly on slab construction.”

Hard surfaces continue to eat away at the market share of carpet, which for years was the dominant flooring option inside new homes. “There is a general feeling that carpet will continue to decline as tile and hardwood begin to take more floor share within each home,” Darnold said. “But there may be additional sales for traditional flooring due to indoor/outdoor combined spaces, such as family rooms and patios that share glass walls that open to the outdoors.”

Flooring choices may vary in single vs. multifamily dwellings as well. For instance, in multifamily, buyer preferences are leaning toward hard surfaces—mainly LVT—at the expense of carpet. “Preferences are trending toward better-end goods in single-family,” Mohawk’s Holt said. “There is a smaller amount of yardage going in, so people are spending more money on their carpet.”

 

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