Recovery is Coming, But Patience Required

March 4, 2011

New York–The long-term prospects for housing are good, "but we're not going to snap back," said John Burns, a home building and real estate consultant, speaking at the Lincoln International 2011 Building and Infrastructure Conference yesterday. Targeted at the investor community, the event featured numerous speakers echoing a view that recovery is coming, but the next year or two will still require patience.

On a national basis, the housing market has not hit the lows seen in the current downturn for more than 50 years, Burns noted. However, this kind of collapse has been seen regionally, he continued, pointing to Houston in the 1980s and Southern California in the 1990s. Those markets both took several years to recover, as it took some time for job growth to return and foreclosures to get out of the system. That is what is happening now on a national level, he said.

ln addition to good prospects for long-term growth, Burns said there is good news in that "housing has found the bottom."  As evidence, he stated, existing home sales for January and February this year are on par with a year ago, without the federal tax credit that was available to buyers at the beginning of 2010.  There are still "areas of concern," he said, pointing to the unusual combinaton of historically good housing affordability levels with relatively low housing sales.  "Too many Americans have lousy credit, no savings and huge debt," he said. "That's why I don't get excited about 2011 and 2012. These are the renters that we want to become home buyers." 

Burns also provided some insights on the "new" new home buyers that will dominate the market when it does eventually strengthen.  Based on surveys of potential buyers across the country, he said, "home design beats price" looking forward. Buyers will care more about the great room, bathtubs, the home office space and huge televisions than the lowest price, he predicted. Too many builders had opted for plain boxes, but they are now beginning to move toward designs that "will get buyers excited."

Buyers want great designs and features, "but that doesn't mean they're willing to pay for it," Burns noted as well.  "What we're seeing is that builders who don't deliver get penalized," he said.  Buyers showed similar behavior with green building features. "It is sort of expected, but no one is willing to pay for it."

Panel Discussions
The event also featured two panel discussions that hit on similar themes.  "We feel like we're bouncing along the bottom," said Donald C. Devine, president and CEO of American Standard Brands, speaking on a panel looking at current merger & acquisition trends. Despite reports that the remodeling segment is growing, he suggested that is still being held back by retreating home values. That view was shared by Harry A. Shaw, VP of corporate development for Owens Corning, who noted that "there is still great uncertainty about the recovery slope."

On the topics of M&A in the building products industry, Michael Katz of FdG Associates, a private equity firm that recently sold its interest in Sunrise Windows, reported it is "a good time to be a seller."  There is a lot of money that's been on the sideline that's ready to get back into the market, but not a lot of good companies available, he explained.

Devine agreed. The finance community is looking at the building product space and say, "recovery is no longer a matter of if, it's only as a matter of when."  Meanwhile, owners of building product companies that have survived to this point ask, "Why should I give you the upside?"

In a second discussion focused on challenges ahead, panelists agreed that one area of concern will be managing accelerated growth when it finally comes.  "Builders and customers are concerned that suppliers will not be able to react to the growth curve and there will be shortages along the way," said Christopher J. McGowan of Madison Dearborn Partners, a current investor in Boise Cascade. "Bringing in labor and manufacturing capacity at the right time will be tough decision for companies," he added.

USG Corp. had yet to see much recovery and was "still in downturn mode" with a focus on right-sizing its operations, reported Fareed Khan, the company's EVP of finance and strategy. "There's definitely going to be a bias not to bring manufacturing capacity back to the supply chain."

Held at the New York Athletic Club, the annual conference attracted more than 100 representatives of private equity firms and strategic industry investors.  It was hosted by the Building and and Infrastructure Group of Lincoln International, a firm speciallizing in mid-market merger and acquisition advisory services, and L.E.K. Consulting, a global management consulting firm.

In conjunction with the conference, L.E.K. released the results of a recent contractor survey designed to examine potential changes in buying habits as the market begins to recover.