Position Now for Residential Recovery

By Richard Walker, AAMA
March 15, 2008
COLUMN : Industry Watch | Management

It is important not to lose sight of the long term and fundamental strength in the residential housing market. Admittedly, it is difficult to see this silver lining through all the doom and gloom publicity about the housing slump. It can be even more difficult when we now hear talk of recession. 

Maybe certain politicians are, for reasons of their own, saying we’re on the precipice of recession, but many economic lemmings are stopping short of the cliff. The basic economy isn’t all that terrible–a point often missed by some in the mainstream media. Edward Leamer, director of the quarterly UCLA Anderson forecast, says the housing slowdown won’t push the economy into a recession. Ed Sullivan, chief economist with the Portland Cement Association, concurs, noting that “Our forecast…does not predict a recession.”

This is not to be a naïve dreamer. Without question, housing starts, sales, prices and permits are way off from the recent boom years and some mortgage markets still have problems. After all, according to the National Association of Home Builders, when things bottom out as many predict in mid-2008, housing starts will be down from their 2006 peak by about 55 percent–a level that the U.S. Commerce Department says represents the slowest pace of new residential building in some 14 years.

NAHB is estimating 828,000 new single-family homes for 2007 and predicting 781,000 for 2008, a 5.6 percent decline. Total housing starts are estimated to come in at 1.36 million for 2007 and register 1.2 million in 2008, an 11.9 percent decline. Obviously, all of this translates into a proportionally down market for residential fenestration products.

Some positive trends are beginning to emerge, however. David Seiders, NAHB’s chief economist, said during the recent NAHB Construction Forecast Conference that housing should begin a modest recovery by the third quarter as builders whittle down excess inventories. The National Association of Realtors projects existing-home sales will trend up in 2008, with pending home sales already showing a slight near-term rise—perhaps a harbinger of this reversal in new construction inventory.

Seiders observes that the long-term potential for housing activity is very good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us—maybe 2 million per year.”

UCLA’s Leamer weighs in on the more pessimistic end of the scale, saying that the housing doldrums will drag on at least through 2009. However, he notes that the downturn will “substantially abate” by mid-2008, with housing starts bottoming out by this summer at a rate of about 900,000 units. “Starting middle of [2008] is when things stop getting worse,” he predicts.

For residential remodeling, Seiders says that a drop in activity of 5 percent or less this year should be followed in 2009 with “numbers matching 2006’s record levels of remodeling and pretty steady growth going forward.”

Point is, whether the turnaround begins this summer or next winter, there are some things we should be doing while waiting for the inevitable change in the economic winds. The main thing: don’t just wait! When demand drops off, it is timely to re-examine, re-energize and re-tool.

Michael Collins, senior associate with Chicago investment firm Jordan, Knauff & Co., which focuses on the fenestration industry, echoed that sentiment in a November Web presentation: “Limit worrying about the present situation and focus on what the future will bring. Rather than focusing on when exactly the down market will turn next year, window and door companies are better off looking to certain trends and pursuing efficiencies to emerge from 2008 successfully.”

Collins points out several interesting trends that may mark the upcoming recovery year. First, several manufacturers are looking to purchase window companies with excess capacity thanks to the sluggish market. He sees this as a positive indicator for the industry, as those shoppers are confident of the industry’s future prospects. With the reality of the soft market, companies in all areas of the industry that are being proactive about developing powerful marketing messages and streamlining operations will emerge in a stronger position on the other side of the housing market dip, Collins says. He suggests honing Web sites, producing new promotional collateral, and rationalizing and/or expanding plants to be ready for the inevitable recovery.

“These are steps that should be taken,” Collins advises. “When the recovery comes, these people [who pursued efficiencies] are going to look like geniuses. They’re doing it when there’s some slack in the system.”

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.