Imbalances in the system are expected as a full-fledged housing recovery secures its footing. The chart below illustrates that starts are currently growing at a 24% YOY annual clip, but completions are up only 9%.
Source: John Burns Real Estate Consulting LLC, Census Bureau (Dec. 2012)
Earlier this week, we discussed labor as a contributor to the gap between starts and completions. This week we are pointing to bottlenecks in the supply chain as another part of that equation. Until the systems that produce and distribute materials to the industry are running smoothly, builders should expect extended build time and higher costs to build.
- Producers and suppliers are skittish about a recovery. After several false-start recovery signals, this channel wants solid confidence in the strength of the industry’s recovery as well as the national economy.
- As a result, they are planning conservatively. Many major suppliers have been unwilling to stick their neck out on robust projections and aren’t likely to adjust forecasts that already seem to be conservative. Consequently, production of materials is likely to fall short of demand.
- Capital allocations are required in staffing, plant operations, and production. Increasing capacity in the material segment is a cumbersome and expensive initiative. Production facilities need to be restarted or sometimes built. These facilities need to be staffed and trained. Distribution channels and sales need to be realigned. The significant investment here is unlikely to occur until these companies start to see their revenue and profitability rise in line with solid new construction and R&R demand.
- Distributors need convincing to invest in growth. As much of the material mix interfaces with construction through a distribution arm, this middleman has an important role to play. These distribution businesses were hit hard during the downturn and many are struggling with financing, worn-out showrooms, and ineffective logistics. Instilling confidence so that distributors believe in a real recovery is critically important to those who want to get their products into the market.
We expect the gears of the housing recovery to be sticky in the next year to 18 months. However, 2013 should be the year that housing’s positive feedback loop begins to directly benefit the product companies:
- Home price appreciation will drive confidence, consumption, and economic growth.
- In turn, rising collateral values will loosen lending.
- As many of these manufacturers are very influenced by R&R revenue in addition to new construction, the increase of credit availability will finally generate real revenue increases.