Volume 9, Issue 11 - December 2008
Volume 9, Issue 11 - December 2008
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Feature A
Housing Market in Pieces While many of the reports appeared bleak during the annual Outlook Executive Conference: ’09 Industry Forecasts and Trends presented in late October, almost all of those in attendance agreed that while the market is down, it is cyclical, and will come back. But, the big question on the minds of most in attendance was “when?” The forecast, organized by McGraw Hill Construction, was held at the Capitol Hilton in Washington, D.C., October 22-23. “The question we’re trying to answer and you’re trying to answer is, ‘when will housing prices hit bottom?’” said Kermit Baker, chief economist for the American Institute of Architects (AIA). However, he noted that after a recession (he called this one the worst in 50 years) the housing market typically does make a fast recovery. “This recovery is likely to be different than past cycles, but the housing industry historically has recovered quickly,” he said. He predicted that once the recovery occurs, housing will actually hit a bigger boom than it did in recent years and that more homebuilding will actually occur in the coming decade than in the current one. Trends to Track “We’re currently rivaling the immigration rates we saw in the early 20th century,” Baker said. “As the number of immigrants continues to grow, we’re seeing them disperse more throughout the United States.” Because many immigrants are in the 20 to 30 age range and often are starting families or have small children, Baker said, “they’re very active in the housing market.” As for remodeling, he noted that it actually held strong for awhile, and even grew in recent years. “Remodeling is approaching the size of the new construction industry,” he said. “The pace of growth has hardly slowed at all during this period.” However, the down new construction market has led to less remodeling, he says, and as with the tightened credit market, there are fewer homeowners, leading to fewer consumers looking to remodel. He also noted that many remodel or make home improvements right after purchasing a home, and since so few are able to purchase homes recently with the strained financing market, this has also led to a recent decrease. “Third-quarter figures point to continued weakness in this market, though we haven’t hit bottom,” he said. Baker does expect the rate of the decline to stabilize in 2009 and 2010, though. Baker pointed to the green market as a plus for this sector. “There is very clear evidence that homeowners are not only buying energy-efficient homes but also are remodeling to make [their homes] more energy-efficient,” Baker said. Baker ended his presentation on a semi-positive note. “Let me remind you, we are in a cycle and cycles correct themselves—just wait,” he said. Federal Fixes “The basic assumption is this—that the extra steps taken to deal with frozen credit markets will be successful over time,” Murray said. “It’s going to take time for the U.S. economy to regain a firmer footing, though.” Murray attempted to answer the burning question as to when the markets will hit bottom, and he predicts this will occur during the first or second quarter of 2009. “Home prices are continuing to drop about 20 percent nationally,” Murray said. “They’ll probably drop another 10 percent in 2009 and then level out.” However, he noted, that this year’s forecast has been one of the most difficult, noting that he and his staff revised the forecast several times based on recent events. “This was a tough forecast,” he said. “This is a cyclical business … There are still pluses.” Murray quoted investor Warren Buffett in referring to what led to the downfall, the three “Is:” innovators, imitators and idiots. In closing, he again brought up these words in looking to a brighter future. “I think by the time you get to 2010, it will be time for the innovators and imitators, and hopefully the idiots will stay on the sidelines,” Murray said. Norbert Young, president of McGraw Hill Construction, ended the host of presentations with a list of what he sees as four positive indicators for the
economy: “Risky” is How NAHB Sums up the Housing Just days before McGraw Hill Construction hosted its annual forecasting session, the National Association of Homebuilders (NAHB) took on a similar feat. It’s not a surprise that the news here was also dismal, though the NAHB seemed to have an even more dismal view than experts at McGraw Hill. “Things are a lot worse than any of us had anticipated six months ago,” said NAHB chief economist David Seiders in his opening economic forecast. “Who would have anticipated the turmoil in the financial markets that we’ve seen since September?” He pointed out that the housing numbers continue to spiral downward and new home sales are still declining. “I would say that the keyword for the day is risk,” he said. “The uncertainties out there are probably unprecedented and the degree of risk forecasted has probably never been higher.” Before presenting his forecast he said it’s as much about risk as it is about forecasting. “I’ve got the single-family starts hitting bottom early next year but then embarking on a gradual recovery process,” he said. “One of the things that is going to be plaguing the upswing is the tightening of the credit market.” Regarding manufactured homes that forecast is dismal as well. “I don’t really see any potential for growth in this market … but basically essentially dead in the water at less than 100,000 units per year,” he said. The same is true for the remodeling market as Seiders said, “It is unquestionably weakening.” “The pattern we’ve got for 2009 and 2010 is somewhat reminiscent of what we saw in the late 80s and early 90s recessions,” he added Additional Views/Forecasts He also pointed out that it’s obviously a poor environment for housing starts and then gave his take on what’s to come. “This year we have the starts at 940,000, next year at 780,000,” he said. Although he talked about other frightening facts such as rising unemployment rates, he did leave attendees with some good news. “One last thought is that, yes, the economics professions missed the severity of this crisis, but I’d like to remind people that just because we don’t know everything doesn’t mean we don’t know anything. We have the world’s experts on recession running the fed right now … I’m still sticking to that we’re going to find some solutions.” When Michael J. Moran of Daiwa Securities America Inc. gave his housing forecast he said his forecast is already proving to be too optimistic “It’s proving to be too optimistic already on housing starts,” he said, then added, “This forecast does not involve a deep downturn.” Bernard Markstein, NAHB staff vice president, also spoke about the “R” word, as did some of the previous speakers. “I think we’re all on the same page—when we’re through this it will be an official recession,” he said. “Yes, we’re in a desperate situation … At least we know when we land the economy will survive, but unfortunately not every enterprise will survive.” He added that some of the measures taken by the government were a step in the right direction. “We’ve seen that the policymakers, particularly the fed, have gotten together and done a lot of the right things, which will take time,” he said. “At some point, new home sales will get better … We need to remember that it will get better.” Seiders also echoed the sentiments of a national recession, but also spoke of a better time to come as we have all learned lessons from this crisis. “I think we have learned something here and it’s very significant,” said Seiders. “I think this is so jarring that we’ll make some major changes. We’ll make mistakes, but I do think we’ll have a better system at the end of the day.” Door and Window Market Report Economy It’s no secret that raw material prices have gone up in recent years due to fuel prices, but until recently, this didn’t seem to be so obvious in the door and window industry. That has changed, though, in recent months, as manufacturers have seen price increases in various materials, such as vinyl. But recently manufacturers—and their adhesive suppliers especially, have seen a new shortage: butyl (for use in sealants and adhesives). Adhesive and sealant suppliers report a shortage of non-halogenated butyl—the type that’s needed for insulating glass sealants—has developed over the last two years. Though there’s an abundance of halogenated butyl available—which is made for products such as tires—suppliers say that only 5 percent of the butyl made is now non-halogenated. “There always was a mix,” says Mark Toth, window sales manager for H.B. Fuller. “For many years non-halogenated was maybe 15 percent of the butyl that was available. That 15-percent supply has now shrunk to maybe 5 percent because there’s been much greater global demand for the halogenated butyl.” So, what’s the solution? Many suppliers are developing hot-melt sealant technologies that use little to no butyl. “We’re expecting to have something for beta testing by the middle of next year,” says Jeff Ogren, market manager, performance adhesives, for Bostik. However, neither he nor Toth expects manufacturers to have to change their processes based on their new products. “Generally speaking, the equipment will be the same,” says Ogren. “If they decide they want to change technologies altogether, there might be some need for new equipment on [the manufacturer’s] end.” Toth doesn’t expect the need for butyl—on the part of sealant manufacturers—to ever go away, though. “I don’t think we’ll ever find products that use no butyl, but hopefully we can decrease the percentage in there,” he said. Toth adds that the chances of more non-halogenated butyl being created in the future are low, at least right now. There hasn’t been any increase in capacity in the last 30 years, and, while he expects the butyl suppliers to look at adding facilities, this process is a slow one. “The cost of building a basic butyl facility is in the range of $6 to 700 million and takes about three years to complete,” he says. “So the additional capacity these companies are looking at won’t be on-stream until 2010 or 2011.”
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