How can builders, remodelers and manufacturers make the best of a potential recession?

  • Categories:

    Industry Trends

  • Date:

    November 10, 2022

How can builders, remodelers and manufacturers make the best of a potential recession?

Industry Trends

The beginning of the COVID-19 pandemic forced the United States economy into an artificial recession, causing trillions in damage. Now, following two consecutive quarters of slowed spending and high inflation rates, many experts predict a mild recession may be just around the corner. But how will homebuilding and remodeling fare? Could the country’s economic woes actually create opportunities in this space for savvy builders, remodelers, and home and building product manufacturers?

I talked with Robert Dietz, chief economist for the National Association of Home Builders, about how industry professionals can use housing market data to alter their business strategy and make the best of a challenging landscape over the next few years.

Q: What is your general impression of the current state of the market?

At the NAHB, we are looking at measures such as core personal consumption expenditures, which consider commodities and building materials. And the numbers indicate that the economy is slowing — in fact, we argue a recession began at the start of 2022. Single-family home construction will post a calendar year decline for the first time in 11 years. Lumber prices are continuing to drop. Unless the Federal Reserve slows the pace of its interest rate hikes, the hikes are going to cause pain.

The challenge right now is that the Fed is looking at a variety of different measures to fight inflation, yet some of these are not directly correlated with economic variables connected to interest rates. NAHB’s concern, from a housing perspective, is that when mortgage interest rates climb well above 7%, something will break. Additionally, thanks to a lack of housing stock, the cost of rent will continue to rise regardless of what the Fed does.

Q: Home sales and housing starts have declined in 2022. What are the primary drivers, and when might the market correct?

We expected the market to cool off some. While 2021 was a strong year, 2022 has been driven by a sharp increase in mortgage interest rates. This increase is negatively impacting the resale market, new construction and price growth.

Builders, realtors, existing homeowners and investors need to be prepared for market prices to fall from recent peaks. In some markets — including really hot markets in the mountain states — the decline could be double the national average.

Previously, construction costs grew 20% to 24% year over year, resulting in increased home prices and a lack of inventory. These factors have driven housing affordability to its lowest point in over a decade, pricing out millions of buyers — particularly first-time and first-generation buyers.

It’s a strange market right now, and the availability of affordable housing is shrinking. Inventories may rise, but in the long run, we’ll still see a mismatch between population and available housing stock. Housing activity is going to be weak until at least 2024. After that, we’ve got a pretty good runway for growth, because the remaining structural deficit will require new building activity to meet the pent-up demand.

Q: How should home and building product manufacturers adjust their outlook over the next year?

Downstream industries can expect the building market to slow. Single-family construction has already declined in 2022, and this trend should continue in 2023. We are betting on a rebound in 2024, when the Federal Reserve will begin to ease off a little.

Multifamily building has been strong but has many units in the construction pipeline — the most since 1974. Thus, we think multifamily construction will slow in 2023, so be cognizant if you’re a pro or manufacturer providing materials or goods to the multifamily sector.

Remodeling should remain strong, and this market will be a positive place for manufacturers to play in over the next year. The single-family, built-to-rent market is another bright spot.

For the building industry, it’s important to consider the medium-term effects of labor shortage, which will last for years. Without question, the labor shortage will remain an issue in the homebuilding space. What does that mean for material providers?

Builders are looking for anything they can do to save construction labor time at the work site. If your product saves a quantifiable amount of labor time at the work site, you can charge a premium even in a weakening market. Builders are looking to protect margins and deal with the labor shortage. There are only two solutions to labor shortage: recruit more workers or make the workers you have more productive.

That’s where building material providers can play a role.

Manufacturers need to offer something that quantifies the number of construction hours saved for a typical home. Something like a flooring solution that joins quickly, almost in a puzzle style, would help fill the labor shortage.

On a theoretical level, there was a lot of discussion two years ago about bricklaying robots. It’s not ready for primetime, but it’s a good general example of added value.

Offsite construction — in other words, panelized and modular construction done in the factory — is another growth opportunity. Today, offsite construction makes up one-third of what it did in the late’90s for single-family homebuilding. It would assist with lagging worker productivity in residential construction compared to the overall economy.

Q: How do these factors impact the home remodeling market?

We need to first think about the growth factors for the remodeling market. People are working in their homes more, with about one-third of the workforce working hybrid schedules. As a result, systems in the home are wearing out faster; we saw a lot of air-conditioning systems failing in 2020.

To work from home, people will also need to restructure their homes. If they have an open-concept floor plan, they may want to put up some additional walls and doors. We did this in my townhouse when my wife and I both worked at home to control noise spread.

Outside of hybrid work-life, the aging housing stock is a significant factor. The median age of an owner-occupied home is 41 years old. Due to a lack of construction in the past 10 years, the average age continues to grow.

Factors that negatively impact the remodeling outlook include higher interest rates and the decline of the resale market, as it’s becoming harder to access equity out of one’s home. About half of remodeling spending is connected to the sale of an existing home, so when existing home market turnover falls, it’s a negative factor for the remodeling industry. Although some experts anticipated a softening in the remodeler outlook, it is much stronger than what we’ll see for new single-family construction.

This is a good time to invest in housing as people are now using their homes as offices. Hybrid working changed the way we think about the economics of commercial real estate and residential real estate: For instance, we consider remodeling in terms of making homes more energy efficient, more resilient and more productive.

Additionally, we must keep in mind that people are going to move less frequently. People are sitting on mortgages with low mortgage rates, which will contribute to shrinking resale stock. If you can’t buy a new home, transform your existing home.

These factors are bullish signs for the remodeling industry.

Q: Do you expect another remodeling boom like what we saw at the height of the pandemic?

There are a lot of homes in favorable commuting locations — ​​not downtown walkable, but close in — that are due for some reinvestment. If reinvestments are made, teardown construction share will markedly rise and act as the bridge between single-family homebuilding and remodeling.

Closing Thoughts

The word “recession” elicits fear and worry. However, after speaking with Robert Dietz, I would suggest that there are also opportunities for growth — especially in the remodeling industry — and new possibilities for market and product expansion.

For markets, remodeling and multifamily are likely to expand, with remodeling outperforming the other. For products, time-saving innovations are top of mind as worker productivity challenges and the labor shortage persist.

For even more insight into the expected recession and how it could affect the home and building industry, read my takeaways from the 2022 HIRI Home Improvement Summit.

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