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State of the Industry: The builder business is back

January 2/9, 2017: Volume 31, Number 15
By K.J. Quinn

Fueled by significant gains in single- and multi-family units, the new housing market skyrocketed by 25.5% in October, an indication one of the major drivers of the U.S. economy and flooring industry is moving full steam ahead.

screen-shot-2017-01-09-at-2-24-55-pm“The builder market is showing improvement,” observed Dawn McElfresh, builder channel marketing manager, Armstrong Flooring. “The variety of homes in production is helping our mix. Single-family price ranges, both high and low, are selling, as are condos and new multi-family buildings.”

Housing starts reached a seasonally adjusted annual rate of approximately 1.3 million in October, the highest pace in nine years, according to the U.S. Department of Housing and Urban Development and the Commerce Department. Multi-family production rebounded, as starts in buildings with five or more units—such as condos and apartments—climbed almost 69% in October to reach 454,000 units, an indication developers continue hedging their bets on this segment. “2016 marked the first year since the Great Recession that single-family construction grew faster than multi-family,” said Robert Dietz, chief economist at the National Association of Home Builders (NAHB).

Single-family starts rose nearly 11% in October, reaching a nine-year high with a rate of 869,000, gains which confirm economic forecasts that the housing market will steadily improve into 2017, according to published reports. “The single-family channel was also very strong for FEI Group members,” David Gheesling, CEO, said. “We expect to see it grow as much as 10% nationally going into 2017.” The group is a network of flooring contractors, cabinetry and countertop dealers, and decorative hardware and plumbing businesses.

Housing permits—which provide a snapshot of pending new construction—grew at a much slower pace. Nonetheless, the 0.3% increase over September for privately owned housing units boosted the seasonally adjusted rate to 1.23 million in October, a new high water mark for 2016. Ground is usually broken within 30 to 60 days after a permit is issued. The builder market is significant to the flooring industry, as approximately one-third of total flooring sales are generated from this segment and a similar percentage of dealers service this business. A firming job market, growing U.S. economy and rising household formations are expected to keep the housing recovery on track into 2017. “Despite rising interest rates, wage gains and job growth are supporting housing demand,” NAHB’s Dietz said. “The industry continues to rebuild its infrastructure, including land and workers, following the Great Recession.”

 

Issues stunting long-term growth
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Further evidence the housing market will sustain growth into next year is provided by the Architecture Billings Index (ABI), whose October score indicated a modestly larger share of architecture firms reporting an increase in their billings, according to the American Institute of Architects (AIA). However, fewer firms reported a bump in inquiries for new projects in November, and firms also cited declining value of new design contracts signed in October. While none of these indicators signals immediate alarm, AIA stated, it is important to keep a close eye on business conditions over the coming months.

Similar sentiments were expressed in industry circles about whether the builder business can sustain growth over the long haul. Rising mortgage interest rates can quickly temper expectations. “However, rates are historically low, so that impact should be modest,” Dietz said. “The primary challenge for prospective home buyers remains saving for a down payment and qualifying for a mortgage.”

New residential construction data can be skewed by regions that enjoyed growth beyond the numbers. For example, while permit issuance rose 12.1% in the Midwest and 7.5% in the West, the Northeast and South saw this number drop by 21.1% and 2.4%, respectively, according to published reports. “We are pretty much flat in builder [market sales] so far this calendar year compared to 2015,” said Larry Barr, president and co-CEO, Floors Inc., based in Southlake, Texas. “As we have seen more starts in each of our markets, the builders are struggling to turn the houses over due to labor constraints.”

The availability of qualified labor in all trades remains a major concern for the channel and continues to limit industry output. While builders are adding jobs, attracting the next generation of construction workers remains a long-term challenge. “In most markets, builders are struggling to find workers in every area, from slab to landscaping, in the construction process,” said Jeff Ausloos, national builder manager, Mannington.

The shortage of flooring installers remains an industry bugaboo, making it difficult for builder dealers to find good help when they need it. Some regions face a shallower pool of craftsmen than others, which can directly impact flooring selections. “In Texas, for example, because of a shortage in ceramic installers, some builders are moving into LVT because they can get a sheet installer to put it in,” Armstrong’s McElfresh said.

 

Housing trends affect floor covering sales
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One trend expected to continue into the New Year is the movement toward smaller home designs, which traces its roots to around the time of the housing market downturn. As homes become smaller, flooring choices for specific areas will be impacted, in part, by how these spaces are utilized. For example, carpet is projected to remain a go-to product for living rooms although hard surfaces are growing at a much faster rate.

“The next generation of LVT [and] WPC products are rapidly gaining acceptance in the new home construction segment,” Mannington’s Ausloos said. “As the innovation in WPC continues it will become a staple product in the channel.”

Still, new home buyers are eager to choose different floors for individual rooms, industry members say. For example, resilient is often specified for a bathroom or laundry room, laminates can be found in a family room or basement, and carpet, ceramic and hardwood are selected for main living spaces and bedrooms. “Millennials who are coming into the market might be looking for smaller but nice homes,” McElfresh said. “We’re seeing a good interest in LVT products for this reason as well.”

Homebuyers still desire natural products such as ceramic tile and hardwood, and upgrades for these higher priced floors are becoming more prevalent. Most upgrade monies are allocated for kitchens and baths because both areas offer the greatest return on investment and time spent in the home. “For new homebuyers, hardwood continues to be the trophy flooring,” McElfresh said. “As the market continues to improve, we see further investments in trade-ups since homeowners are looking for homes not purely for resale value, but for their own comfort and pleasure.”

In addition, homebuyers planning to be long-term occupants are willing to invest in better quality products. “They realize the long-term value of upgrading to better looking, better performing products,” Mannington’s Ausloos said. “We are seeing trends that verify this in our upper-end hardwood lines Maison and Antigua.”

Ceramic as a percentage of total flooring in new homes continues to rise as it finds more applications in spaces such as patios, garages and basements. “We have also seen more tile sales compared to carpet, for the first time,” Floor Inc.’s Barr said. “I believe this is because there are an abundance of lower priced, good looking tiles that buyers find attractive.”

Industry members cite the importance of educating new homebuyers about the features/benefits of flooring so they can make informed purchasing decisions. Products which provide a logical “trade up” story can have a real impact on upgrade sales.

“If there’s true differentiation from one level to the next, it’s likely that a consumer will choose the upgrade,” Ausloos said. “One builder that Mannington does business with in the Northeast has seen homebuyers selecting upgraded Maison and Antigua hardwood collections 44% of the time.”

As the housing market continues to grow, multiple flooring choices are expected to reap the benefits. Considerations such as budget, styling and value play a major role in determining which products are chosen for different areas inside the home. “We address each of these needs in a big way, with the broadest collection of products for every type of home, in every region of the country,” McElfresh explained.