What’s Next for Building Products and Home Remodeling?

Podcast
The pandemic taught many lessons. In housing, one was that disruptions in the things we build homes with can, unsurprisingly, bring the industry to its knees. As 2023 draws to a close, we ask: Are we finally past all of that—the rising prices, broken supply chains, and interminable waits for everything from a garage door to window latches that forced builders to wait weeks to sell a home that was otherwise ready to go? Can we finally stop using the phrase “post-pandemic” and just move on?

Matt Saunders, JBREC’s Senior Vice President of Building Products, lives, eats, and breathes this world. On the latest episode of the New Home Insights podcast, he joins me to walk us through the latest in building products and trends in remodeling and discuss the future of these spaces.

Featured guest

Matt Saunders, Senior Vice President of Building Products Research, John Burns Research and Consulting

Matt leads JBREC’s building products research practice, which includes overseeing our research reports, our macro building products thesis and forecasts for both repair and remodeling and new construction.

 

Transcript

Dean Wehrli:

Welcome to the New Home Insights Podcast. I’m your host, Dean Wehrli. We try to be pretty diverse here on the show and keep an eye on every part of housing. That means it’s time for a check-in on the building product side of the industry. Building products are kind of the nuts and bolts, bad pun intended, I guess, that have caused a lot of heartburn over the last couple of years, whether it’s been due to supply chain disruptions or escalating price increases.

So we’ll ask some questions today, like have we gotten past that? What does the supply chain look like now? Have the disruptions changed? Are there different ones on the way? What are industry players saying? What do they expect to happen next? What does the data say? What about the future and what are preferences changing? What is happening with demand and what has changed that makes things different this time as opposed to kind of the last parts of the cycle or the last few years? So to walk us through that today, we have Matt Saunders. Matt is our senior vice president of Building Products Research here at John Burns Research and Consulting. That means that Matt watches and studies this space literally daily. Matt, how are you this morning?

Matt Saunders:

I’m great. How are you, Dean, today?

Dean Wehrli:

I am good. I’m going to ask you first give us a little bit of a kind of a self-interest, so we know Matt Saunders a little bit better before we start. And then, also, for our audience, audience is pretty diverse, give us a brief primer on what we mean when we say building products. So Matt, take it away. Tell us about Matt first.

Matt Saunders:

Great. So Matt Saunders, I’m the senior vice president of Building Products Research here at John Burns Research and Consulting. And so what that means is I work with our team to develop our overall thesis in the building product space as well as our forecast. And previous to John Burns, I was with Fortune Brands Home and Security, now Fortune Brands Innovations. And in a prior life, I was a central bank economist. So that’s where I come from. Diverse background.

And when we talk about building products, what we’re talking about specifically here are the building products that flow into two end markets. The new construction end market, those are homes that are under construction right now. So you can think plumbing, fixtures, cabinets, countertops that are flowing into homes under construction as well as the repair and a bottling end market. And these are building products that are flowing into the existing housing stock. So we’re talking about very big-end markets. And so big part of housing and a big part of the overall economy.

Dean Wehrli:

So you really are literally talking about the things that build the building industry and all things.

Matt Saunders:

The things that build the building industry, I think that’s a great way to describe it.

Dean Wehrli:

You can use it. It’s yours for free. So let’s start by… I think give us a little bit of a history sort of how we got here. So the housing and the building product cycle and how they relate. First, just orient us, can you take us and maybe give us a little bit of a recap on how we got to where we are now in the building product cycle?

Matt Saunders:

It all goes back to when the pandemic hit in Q1 of 2020, and this really set the context for where we are now. the monetary and fiscal response was aggressive. Trillions of dollars were thrown at the economy and effectively dropped the Fed funds rate to zero and they also resume purchases of longer dated securities, quantitative easing in the Fed’s jargon.

And so what did this do, this plummeted mortgage rates, plummeted key interest rates for remodeling such as HELOC rates? And what we saw was an overall boom in housing activity, household formation surge. This was also aided by broader acceptance of work from home. We saw very strong housing activity. And then on the remodeling side what happened is we were trying to figure out what was going on at the time, we floated a survey, and what we found was there was a immediate increase in smaller state DIY remodeling projects and a cancellation of those larger projects that usually involve a pro. This was really unprecedented in terms of the share of walking that went to remodeling activity and what we saw as interest rates dropped, there was also a lot of ReFi activity. Those deferred large projects came back first on the exterior of the home and then into the interior of the home. Until I would say the end of 2021, we’ve had some of the strongest building products activity in terms of overall spending at share of wallet in the economy.

Dean Wehrli:

So some sectors, though, and some companies, I imagine, fared a little bit better in this process, weathered this storm a little better than others. Are there some examples of some companies that might’ve done a little better in this period?

Matt Saunders:

The home improvement retailers, they did very well in the space. And I would say it was quite broad based across building product companies. If we look at their overall activity and across this time period, very strong activity overall in building products. So what’s changed right now? So I think it all goes back to the Fed in terms of what changed. The Fed got a little bit behind the curve in terms of inflationary pressures. Inflation was well above their two percent target as measured by PCE, their preferred measure, as well as CPI. So what happened is the Fed really embarked on one of the steepest rate tightening cycles on record, I would say the steepest rate tightening cycle in a generation. this really did impact overall housing and building products.

What we saw is, for example, if we look at where mortgage rates were to end… around February of 2022, where they’re just a shy below four percent to where they are now, this reduced the pool of prospective buyers by about half. This impacted housing but also impacted building products. So the affordability is really the issue of the day within housing and builders have responded by redistributing incentives away from building products such as cabinets and countertops and towards those rate buydowns. This is the biggest bang for their buck. But what we’re seeing right now is that because there are these trade downs happening, building product spending per start is down right now. And so that’s really happening on the new construction side.

And on the remodeling side, also, a lot of this goes to the Fed, as the Fed embarked in a very steep rate tightening cycle, HELOC rates jumped from around four percent to eight percent. And what we know from the data is that larger building products are more likely to be financed using home equity. So this is really deferred a lot of these larger, I would say big ticket remodels and also an overall sense of consumer caution. So we have reverted from very strong growth to what I would say very weak growth at this point.

Dean Wehrli:

Let me ask you a question. I’m surprised with here, Matt. Do you think there has been an impact yet from the pullback from folks going back to the office? You mentioned that a lot of folks, because of COVID, were able to work from home and went and bought that bigger house in the suburbs or even the exurbs or even further afield. Do you see anything happening yet or do you think we’re going to see some impact on the building product sector from people, say, being forced to move back into central locations? I mean, for instance, could they lose their equity or have to tap out and then go back and get a much more expensive smaller home and lose that larger home in the suburbs, something like that?

Matt Saunders:

I think we’re already seeing that in the data. So for example, when there was just more time spent in the home, there was just much stronger building products activity. We’ve done some analysis and really pinpointed when around that Q1 of 2020, there was just a much higher increased share of wallet going towards, say, renovation activity. What’s really interesting is if you look at the giveback to say other forms of spending, such as travel and entertainment, that share of wallet has come down since then, but there was a prior trend line of overall home improvement spending taking a share of wallets. So we’re now just joining up with that prior trend. So there’s very strong, I would say, pre-existing conditions for remodeling of an aging housing stock and what we would call structural drivers in the research. So I think we’re already seeing that in the data and that’s part of the give back. But there were pre-existing conditions that were very, I would say, conducive for strong building product spending.

Dean Wehrli:

It makes perfect sense that there’s a give back. People bought that house they didn’t expect to buy for 10 years or ever, and so they needed to do things for it. It’s like a lot of groups that got impacted by COVID and thought that was the new reality. It just in hindsight actually honestly in sight at the time, that seems like kind of a ludicrous assumption. But there you go. We won’t name names, but there were some very prominent companies that had that kind of magical thinking. So let me ask you, let me have you do a little bit of a digression here, Matt. I want to talk to you about method and analysis. How do companies use the data and the analytics that you and others provide to help them plan and how long-term or what kind of timelines are they doing when they plan? In other words, what you do every day for your clients, what do you do for them and how does that impact their decisions?

Matt Saunders:

One way that clients use analytics and use our research is to understand overall demand for their products, because each product has different drivers, has a different outlook. So one thing that we’ve recently done is we’ve partnered with Home Innovation Research Labs to develop our Building Products Demand Meter. And what this is we’ve developed historical estimates of end-market demand, the new construction, and the repair, remodeling that I mentioned across 18 different product categories and we’ve also developed an outlook for that.

Building product companies can use that data for a number of reasons. For example, to understand do they have they invested enough in their plants and their equipment to meet demand on the horizon? They can use it to target marketing efforts, but analytics is really important here to understand the overall consumer groups and also what to watch in terms of inflections in building products demand and what are the conditions that would contract their demand for their products and increase demand for their products. That’s what we do every day. We have surveys across the whole building products value chain as well as we have econometric models where we estimate demand for building products by category and by end market.

Dean Wehrli:

And I remember seeing at a conference once, I won’t say the sector or the person who it was, but it was a CEO of a building products company and he said that the consideration in terms of making a new factory, they had tremendous, I mean, they were working people around the clock, they really needed the greater capacity, but that factory is going to take roughly four years before it became online. So they have to think ahead at least that long, “What is demand? What is the market going to be at least four years from now?” I mean, how do you do that? Are you projecting that far into the future?

Matt Saunders:

We are. So we’re projecting four to five years into the future, and we’re understanding what is demand coming down the pipe. So for example, this is really important because economists have a concept called the output gap, which is the difference between what the economy’s currently producing and what its potential output is. Building product companies can apply this same concept to demand for their products. And what we’re seeing in the data itself is that there are constraints on material availability, labor availability that will prevent increased production to meet surges in demand. So that’s an issue now, but it’s also an issue longer term to plan for those on the horizon because you want to be competitive, you want to be competitive with your supply chain and the ability to deliver and be nimble once demand does turn.

Dean Wehrli:

Thank you for that digression. That’s a little bit selfish. I wanted to know that answer as much as anyone out there. So now back to our regular programming. That was a nice segue though, I think, because I want to now talk about the surveys that you folks do and what they tell us about the current building products environment. So one of the key ways that you know what you know is through surveys of key actors in any given space along the whole building products spectrum. You and your colleagues on the building site at JBREC do this routinely. I know this sounds like a plug listeners, I apologize, it is kind of a plug, but it really is important because what it indicates is that when Matt’s given his opinion here, he’s given his opinion that is based on real data, not just off the top of his head. So let’s start with remodeling. Tell us about that survey and what it is saying for the remodeling sector right now.

Matt Saunders:

We have a variety of surveys and we really survey the entire building products value chain. We started with the building product manufacturers. We also survey the dealers and distributors and so it’s really important to know what’s happening in the dealer distributed network because most building products are not sold directed to consumers. So it’s important to understand inventory and demand conditions selling versus sell out. We also survey the homebuilders and we also survey the contractors and their remodelers, which is what you’re speaking to here. We have a best-in-class survey called the US Remodeler Index Survey, which we do with Qualified Remodeler and we survey around 630 professional remodelers. What we’re learning there is that households are becoming much more price sensitive. They’re looking to cut costs. They’re starting smaller projects. The scope of projects is being reduced, as well as they’re breaking larger projects into smaller phases, all in an effort to really manage risk.

One stat I’d like to focus in on that is around 49% of professional remodelers are seeing fewer than normal project inquiries for new projects relative to what they would expect. So this is important because it’s a leading indicator of future projects. We are seeing remodeling really slow down, and our estimate is that remodeling began contracting in the first quarter of this year. And it’s really goes back to what I was mentioning, the cost of accessing home equity. Home equity is close to record high in real terms adjusted to inflation, but the cost of accessing that home equity hasn’t really shot up 2X, and consumers are becoming much more cautious.   This all goes to along with that pull forward that we mentioned, the overall contraction we’re seeing in remodeling right now.

Dean Wehrli:

Do you think that is purely due to cycles and most importantly due to mortgage rate, interest rates, borrowing rates? That is to say the whole work from home thing, excuse me, I mentioned a minute ago already kind of played out before this happened that was kind of done. So this slow down is really entirely due to rates to borrowing cost.

Matt Saunders:

Yeah, I would talk to two principal drivers. The one is the overall caution of consumers around those big ticket discretionary purchases. So it’s really important to note that when we’re talking about where the cycle is in remodeling, it’s on those discretionary we’ve called them kind of nice to have remodeling projects. That’s where we’re seeing the contraction. Different story if you looked into categories such as roofing, those are more kind of non-discretionary.

So the first one I would point to is just overall consumer caution. And really, a lot of uncertainty about where the economy’s going. Are we going to enter into a recession or not? Consumers are doing what would be predictable, they’re pulling back on those purchases that they can delay. And the second one is just because we are seeing that households are staying their homes longer, they can afford to wait until interest rates come down and then they can tap that home equity. So they do have option value to wait given they’re staying their homes longer. Once the cost of accessing home equity comes down, that’s when I think they’re going to tap that equity. There is pent-up demand on the horizon right now.

Dean Wehrli:

So the roofing is actually a key one. So the things they have to do, they’re going to do unless they want to put a bunch of buckets down in the kitchen and just sort of catch that runoff for a little while, that’s going to get old.

Matt Saunders:

That’s exactly it. Maybe going back to what we’re seeing on the remodeling side as well, we also partner with the National Kitchen & Bath Association on our Kitchen & Bath Market Index Survey. And so we survey all the segments in the kitchen and bath space, the designers, the contractors, the manufacturers and the retailers. And very similar to what we’re hearing within our US Remodeler Index Survey, we seeing an overall contraction there. We look at the diffusion index for current conditions, that’s below the neutral benchmark of 50, meaning more kitchen and bath firms are reporting a contraction in current activity rather than growth. And I think one thing kind of brought to light from that survey and it was really a lot of the comments is that remodelers are having to work harder to get those new leads and they’re really emphasizing those sales and marketing efforts right now. So it is harder, like you said, there was a lot of pull forward and there’s just an increased emphasis of getting those leads and those conversions are just much more difficult in the current environment.

Dean Wehrli:

Is kitchen and bath an example of something that is much more likely to be pretty discretionary?

Matt Saunders:

I think that’s the best example there and the prime example of a large discretionary project. We watch this quite carefully because it is a leading indicator for those large discretionary purchases within housing overall. So we have a great leading indicator within that survey to understand what’s happening and when we see potentially those projects coming back. I mean, another thing that’s [inaudible 00:19:50] I noticed is those large projects act as kind of like an anchor for smaller projects, we’ve called these eco remodels. So what’s a larger project comes back, there’s scope creep, which is often the case, but there’s also you see smaller projects kind of attached to that larger project. So very important for when we see demand coming back, we’re watching that survey very closely.

Dean Wehrli:

I am going to next ask you about your dealer survey, another survey that you folks do, but first, just for the sake of our audience, when you say dealer in this context, what exactly do you mean?

Matt Saunders:

We’re talking about dealers are building products in independent lumber yards. So this is where building products are held in inventory and sold to, say, the professional welders, sometimes DIY customers, as well as the home builders. As I mentioned before, most building products are not sold direct to consumer. So we’re understanding what’s happening in that dealer and distributor network and we capture around 6.6 billion in industry revenue within that survey. So a nice sample of what’s going on.

What we’re seeing right now within building product dealers is that… And I should mention we also have, we partner with the National Lumber and Building Material Dealers Association on this as well as the Executive Council on Construction Supply, so two great organizations that we partner on our dealer survey. So what we’re seeing there is also weak demand trends in terms of order growth that had been contracting for every month this year until just recently last month where we did see an increase of four percent. I mean, that doesn’t make a trend, but overall, quite weak growth.

One thing we are seeing within the dealer survey, and this is something that we’re seeing more broadly, is that if we look at, say, custom home builders, they’re seeing much more robust growth. So wealthier customers for building products are reporting more robust demand. While those trade downs are clearly evident, there’s a kind of bifurcation within building products right now that’s not going unnoticed. And we’re seeing that in our US Remodeler Index Survey. We’re seeing that in our Kitchen & Bath Market Index survey, as well as in our dealer survey, that although there are trade downs, although we are seeing weaker demand trends, those wealthier customers are much more robust in this environment and much less interest rate sensitive, I would say, those cash buyers there.

Dean Wehrli:

That’s the hundredth example of the economic bifurcation that we face. I mean, really it’s amazing you could trace that kind of an impact anywhere in the economy you care to look, and it’s getting more pronounced every year, it seems like. How about building product prices? I know that’s something that everybody in this space is going to be concerned about. What’s happening at least in the survey data to prices?

Matt Saunders:

What we’ve seen in the survey , which was quite interesting is that there was a huge run-up in prices, no doubt about it. When the Fed dropped rates and there was a surge in housing and remodeling activity, we saw the overall price of building materials go up over a short time period around 40%. So just a huge increase in prices. What we’re seeing right now is that they’ve returned to more moderate price inflation, so two percent, but two to three percent right now in a survey.

But really, importantly, there hasn’t been an overall give back in the price level. So this is pressured affordability levels. I think we were the first to say that as the Fed wraps up interest rates and really looks to use those interest rates sensitive sectors such as housing, don’t expect a broad-based giveback in building material price levels. We said you would see this more on these commodity-type building materials, such as lumber, but if we looked at the products that have more manufactured value add, we did a historical look back and we thought this would really hold here and that’s what we’ve really seen play out that those more manufacturing value-added products that have higher exposure to say the more stable remodeling end markets have held up. So just to summarize what I’m saying, return to more moderate inflation there, but importantly, the overall level hasn’t give back to say where we were pre-pandemic.

Dean Wehrli:

You mentioned your Demand Meter just a couple of minutes ago. Anything else you want to flesh out about that metric?

Matt Saunders:

We’re monitoring what’s happening across those 18 building product categories including what’s happening on the new construction side as well as the remodeling side. Some things that I’d emphasize and kind of echoes what we were talking about in the other surveys and what our projections are showing is that if we look at where we’re seeing weakness right now, you can really pick up out categories such as cabinets and countertops. So these are attached to those more discretionary kitchen and bath projects. And so not surprisingly, we’re seeing the biggest contraction in terms of what’s happening there.

Earlier this year, we saw a much weaker growth in terms of products on the new construction side that were installed earlier on in the build process. So for example, it goes in as part of framing, those project, products are starting to come back a little bit given the strength we’re seeing in builder activity. And we are seeing that kind of discretionary/non-discretionary thesis also play out in terms of our demand meter. So for example, roofing, we’ve had a lot of weather-related roofing damage and we’re seeing that roofing repair activity in our demand meter this year is tracking above the 10-year average. So really reflecting those more robust non-discretionary categories, but also there was an added boost there in terms of all the multi-billion dollar weather events that we’ve had, and roofing has been a beneficiary of that.

Dean Wehrli:

I’m telling you people, it’s cheaper just to buy a bunch of buckets. I’ve made my case, I’ll move on. So let’s move on to in terms of what we were going to talk about here. I want to talk about, is there anything different now than “last time”? Market watchers of any sort, it seems like, are always trying to find things that are different this time than they’ve ever been before, and mostly, let’s be honest, they’re wrong. Honestly, most trends you see in the media is because the reporter has three friends, that personal friends that said, “Yeah, I do that now.” And suddenly, it’s a trend and the New York Times is right in about it. So having said that, change is constant. I’m not trying to say… So change happens all the time, and you’re constantly monitoring change. I just mean that the vast bulk of change, I think, are usually at the margins. I’ll get off my soapbox about that now and ask you what kind of changes or differences are you seeing now than maybe were happening in past years in this space?

Matt Saunders:

I think one thing that I’d point to that’s shaping remodeling activity going forward is what’s happening with household mobility. So if we just go back to the demographics, we’re seeing that we have an aging population. We know that as households age, they just move less in general. And there’s a lot of home equity and wealth that’s built up there with older households. So if you think of households that are 55 and up, that’s where mobility just across time periods tends to slow down. And then younger households, a lot of them have very low mortgage rates. I mean, this lock-in effect is being kind of talked about at length and I think we are a little bit beyond peak lock-in those mortgages or amortizing, but there is a strong incentive there for households to, I would say, stay in place and remodel rather than move.

And so if we look at the indicators of remodeling previously, there would be a very strong correlation with the turnover and the housing stock. What we are seeing right now if we actually do very careful analysis is that, say, existing home sales are not as important for remodeling this time around just because of households are staying in their homes longer. So I think that’s something really to watch here and it’s something that we could prove out in the statistics.

I think another thing that’s very different this time around and just going back to what we’re talking about in terms of supply chains and building products being kind of like forward-thinking and going back to that output gap concept that we chatted about, I think this time around, there is much less ability to ramp up production in terms of building products than in prior times when we’re coming out of the cyclical downturn. And so I think that’s really important because historical analogies are just less applicable this time around. And I think labor and material availability are going to be much more of a governor on growth going forward. So I would say we shouldn’t expect any kind of hockey stick recovery anytime soon.

Dean Wehrli:

Matt, those are some good points. Those are some points those sound like real change. And I think one of the reasons we are seeing real change right now is because we are coming out of an extraordinary historical time, very an ahistorical kind of event. I think that does naturally lend itself more to major shifts.

Matt Saunders:

I think that’s absolutely right and I think if we go back to on the new construction side building products that are flowing into new construction, there’s also very, what I would say, kind of structural shifts going on and I think it all relates back to how poor housing is right now. So builders are solving for affordability. One of the ways that they’re doing this along with installing less costing materials than are under construction is there are laser focused on cycle time improvements. The way that builders are doing this is they’re building smaller homes within denser communities and so they’re able to deliver homes what we’re seeing at a faster clip than last year.

And we think that cycle times can improve by a full month. And so if you think about it, that’s really important for bringing cash flow forward for both of the builders as well as the building product manufacturers, those cycle time improvements and it’s also fits into the overall issue of poor affordability, the ability to bring on supply at a faster clip. So I think that’s very different this time around in terms of how builders are laser focused on solving this affordability issue and improving cycle times is one of the ways that they’re doing it.

Dean Wehrli:

How about anything else in terms of outlook for building products in terms of just overall sector demand that might be different this time around?

Matt Saunders:

Our overall outlook for building products next year is for it to grow at a muted pace. Say, one to two percent growth in nominal terms, so this includes price. And if I were to talk about where we’ll see stronger growth compared to where we are right now, it’s really in the back half of next year. I think where I call out stronger growth is within those discretionary categories that have been deferred.

So those ones that, for example, we talked about cabinets and countertops, I think we could see in the back half of next year those discretionary projects start to come back. And that’s also related to the overall conditions in the economy. We do think that the Fed is going to start easing rates in the back half of next year. This will ease the cost of accessing that home equity. And so there is pent-up demand on the rise. And so I point to more of those discretionary categories as what to watch next year. And so those big ticket categories, that’s where there’s more pent-up demand. But going back to what we were saying about there’s more constraints in terms of labor and material and availability, this will likely support longer term steady growth than any kind of hockey stick in those categories.

Dean Wehrli:

So we’ve kind of moved into your outlook for 2024, let’s continue with that. Just a few minutes ago, you mentioned the cycle and affordability and attainability in terms of price. This is a pet thing with me, but I’m going to ask you anyway, do you see any kind of product innovations on the horizon that might help with that? And specifically, I’d love to hear your take on things like panelization or 3D technology, any kind of almost quasi-revolutionary innovation that might help with respect to cycle time and cost.

Matt Saunders:

Well, I think most of the builder’s response here in terms of improving cycle times has been more incremental, so simplified floor pat plans, denser communities. I think these are kind of like the low-hanging fruit. When you talk about panelization, I think that has a very small share of market and it’s always been this is going to happen tomorrow. I would say, I think one of the lessons that I’ve learned from innovation is that those players in the market get very good at what they’re doing on a day-to-day basis. And in terms of disruptive change that often comes from adjacent industries or different industries altogether. So I think it is something to watch for and that disruption is always a constant threat. And I think we are seeing within the building product space that in terms of technology that’s coming from other industries, those barriers between industries are becoming a little bit more blurred. So long answer to your question, I think how builders are responding right now are more incremental but never rule out disruptive change in any industry.

Dean Wehrli:

I completely agree. Some of these you would love to see, but I know the barriers to entry, if that’s the right term, are astronomical. Are you seeing though builders get back to more normal cycle times? It seems I’m hearing a lot of that.

Matt Saunders:

Yeah, I think that’s it. I mean, we are returning to more normal cycle times. We’re forecasting, say, a month being shaved off cycle times next year. And you think about it, it’s like adding an additional month to the calendar year, so that’s quite substantial in terms of builder revenue over building product revenue as well. I do think that affordability is such an issue and we estimate we have a housing unit shortage right now, which is I think central to why we have this housing unaffordability problem along with the rapid increase in interest rates that we spoke about. So I think this is an issue that we have to tackle as an industry and whether it’s incremental change or it’s something kind of completely exogenous. I think we should embrace that to solve this overall affordability conundrum that we’re in as an industry.

Dean Wehrli:

How about the multifamily space specifically? Are you tracking that? What’s happening in that part of the housing market?

Matt Saunders:

What we’re seeing right now is that there’s just way more multifamily units that are being delivered to market relative to household formations with them in that space. And so we see that flowing into next year, and multifamily has been a source of growth given elevated cycle times, given elevated units under construction. But we’re calling for quite a substantial contraction in multifamily next year and starting next year and for the fall year from our forecast. So I think this is something to watch much stronger growth in single family. When I say much stronger growth, I’m talking about around one to two percent nominal growth in single family, but overall contraction in multifamily. So of all the pockets of weakness that I call out, I think it would be the multifamily space in terms of building products and market demand.

Dean Wehrli:

How about remodeling? What’s your projection, your outlook for that space?

Matt Saunders:

So our projection for that space is around two percent growth next year in remodeling, but a contraction in the first half of the year and return to growth in the second half of the year. And so really when we go back to what we’re talking about, what adds kind of the cyclicality to remodeling, it’s really those discretionary projects, which as we see interest rates ease. Assuming we don’t have recession, that’s going to come back next year, but very different drivers this time around.

So I would really look at real house price appreciation for those bigger projects for smaller projects. As I mentioned, smaller projects are being reduced in scope and so smaller projects are much more steady next year. But I look at real income growth for what to look for smaller project growth. And then, overall, for those larger projects going back, I’d look at interest rates and the cost of tapping home equity, which is, as I mentioned, closer to record high in real terms coming down. And that’s really one of the triggers that we’re looking for for stronger discretionary big ticket remodels in the back half of next year. So overall, muted growth around one to two percent, but really back half weighted.

Dean Wehrli:

Is it fair to say that remodeling is going to react in more normal ways like it has for many, many decades than it did in the COVID and immediate post-COVID era?

Matt Saunders:

I think that’s fair. One thing that we look at in our research is what we call these secular structural drivers. And so we do have an aging housing stock. We do have households that are staying in their homes longer. We do have high home equity levels, and we do have deferred pent-up demand for discretionary remodeling categories. So I think we will return to historical rates of growth, but I think is going to lead to sustained steady growth. And I think it’s just like the duration of the steady growth that’s really going to potentially separate it from prior cycles. But also, if you look at the data in prior cycles, there was a surge in remodeling activity coming out of a downturn. I think that’s just not going to happen. Those governors, as I mentioned, labor material availability are going to really prevent that. And so differences in terms of those underlying structural drivers driving steady growth, but also differences in those constraints on growth as well.

Dean Wehrli:

But won’t a lower mortgage rate environment gin up… Those folks who have been in their house for 10 years, we know that people are staying in their house longer, I think that number’s going to change really quickly if mortgage rates creep back towards five percent, don’t you think?

Matt Saunders:

I think it’s a fair point. I think that we are beyond that peak lock-in. I think that’s more of a point in terms of incremental supply, I don’t see a huge deluge of supply coming on and getting back to say the early 2000s in terms of existing home sales activity. And then something that’s also different that we talked about is just households are aging and we know in the statistics that households move less as they age. I mean, my mother-in-law is a great example, she just did a big kitchen remodel. Her and her husband have high home equity, so they’re choosing to stay in place and remodel rather than move. And I think this is something very different we see in the statistics than, say, prior decades where you would have more of an association with remodeling to housing turnover than what we’re seeing right now across building product categories. The correlation is just much weaker.

Dean Wehrli:

I agree. I don’t think there’s going to be a big bump in supply either. And I, for sure, acknowledge that demographics have a lot to do with when people move. I just think that if you do get down, as markets rates do move downward, knocking more that they continue to do so, you will see an increase in transactions. But I agree, I don’t think it’s going to be dramatic. So let’s end here, Matt, with a couple of questions making you look into the future, because as you know, I like to make my guest uncomfortable. That’s what a good host does. So are we ever going to get past the time where we’re thinking so much about supply constraints and supply chain disruptions and bottlenecks and things like that? Is it ever going to get normal again?

Matt Saunders:

Well, going back to our dealer survey that we spoke about, relative to current demand conditions, I think supply chains have largely normalized, but this is also in the context of quite weak demand conditions that we’re in right now for building products. I think that if we look at those factors such as an aging workforce and we also have immigration policy that isn’t helping as much, and then also if we look at overall cap spending that went into the building product manufacturing space and how that takes a two to three-year process to de-bottleneck an existing plant and also for supply to come out from a greenfield plant, I think that these constraints, in terms of the supply chain, are going to likely be with us for some time to come. And I think that’s also going to be kind of like a blessing as well because it’ll also allow us to moderate the rate of growth and we won’t just pull that all forward. We’ll see sustained demand once we do return to growth, which we anticipate will be the second half of next year.

Dean Wehrli:

That’s a fair point. When we are going through big changes, whether there are up or down, that’s when folks aren’t sure how to plan and what to do next. Steadyness is boring, but it’s usually the more safer environment for a sector, and it’s usually a pretty profitable environment. Let’s end with disruption though. You said a minute ago that we should make alliances for some kind of major disruptions. They do happen and they can happen. So I’m going to put you on the spot. Do you see any major disruption in the future, or at least… And then that might be too specific maybe. Do you see what sector, what part of the building products world do you think is most likely that a major disruption could occur?

Matt Saunders:

Well, if we talk about disruption and innovation, I think there’s a lot of innovation going on within building products. You can just see this at, say, the Consumer Electronics Show, which where building products are featured quite prominently. So a couple examples in terms of what’s happening within plumbing in terms of leak detection and water management. There’s a lot of smart home technology that’s being put towards that. There’s innovations going on and things that you would think are kind of humdrum, like toilets, for example. Toilets are able to screen for health conditions. And so there’s this real coupling of building products and technology, which is really exciting in the space. But I’ve looked at a broader adoption of technology almost external to the factor which is being fused with more traditional industry, which is making the future quite bright and exciting.

Dean Wehrli:

Yeah, I agree. It is funny you say that, because I was thinking the same thing. It is most likely to come in the product or maybe even the construction sector, too. I’m not going to harp on panelization in 3D again, but something like that could take off. So we’ll see. You’re right, a lot of change comes in technology, doesn’t it, and comes in electronics, so that’s probably the most likely place to look, I guess. Matt, thank you so much for comment on the show. This has been a pleasure.

Matt Saunders:

It’s really been a pleasure, Dean.

Dean Wehrli:

Thank you very much. This has been Dean Wehrli for the new Home Insights Podcast. We’ll see you again in a couple of weeks.

 

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