Earlier this year, Principia reported observing a downward trend in total housing starts and per capita housing starts observed over 60 years of available historical data. Following the analysis of the causes and consequences of this downward trend, the focus shifted to analyzing existing housing stock in the United States to understand the relative influence repair and remodeling has on building product demand.
Over the past 20 years, existing housing stock has generally grown at the same rate as the U.S. population, resulting in existing stock per capita holding nearly constant. Looking at the steady existing stock per capita in combination with the long-term decline in starts per capita, new construction’s share of the housing supply has fallen from greater than 2% throughout much of the 1970s to less than 1% in recent years. This decline means that the repair and remodel share of building product demand will continue to increase.
Figure 1: Housing Stock versus Population, 1971–2017
Three Takeaways from Figure 1
- The existing housing stock outpaced U.S. population in terms of year-over-year growth every year between 1970 and 1989, leading to steady growth in the housing stock per capita from 0.335 (2.99 persons per home) in 1970 to 0.428 in 1989 (2.34 persons per home). This level has not been reached again since 1989.
- After a brief decline between 1989 and 1991, the housing stock’s rate of change varied closely around population growth, which has been below 1% and decelerating since 2000. As a result, the existing stock per capita has held nearly constant at an average of 0.419 (2.39 persons per home) since 1989. See Figure 1 and top chart of Figure 2.
- Housing stock per capita has a statistically significant positive relationship with time before and after the peak in 1989, as well as over the entire period shown in Figure 1 and 2. However, the rate of increase has declined sharply; the trend rate of change leading up to 1989 (0.0048/year) is over 10 times greater than the following years (.0004/year).
Figure 2: Housing Stock per Capita and Starts, 1970–2017
As shown in the bottom graph of Figure 2, the trend in new construction’s share of the housing supply parallels the trend in declining new housing starts per capita: falling over time at a declining rate. Housing starts as a percent of the existing stock have dropped from an average of 1.9% in the period from 1970–1989 to 1.1% in 1989–2017. This decline represents a statistically significant negative correlation with time across all periods measured, however the trend rate of change (-0.02%/year) is more moderate from 1989 onwards than (-0.06%/year) from 1989 and before. It is noteworthy given the cyclicality of new construction that the last few years of data have been above all three calculated trend lines.
Implications for Industry Participants
One possible explanation for both trends is that the U.S. housing supply is approaching a steady state at which new construction is just enough to offset population growth and the existing stock retired from use. Whatever the cause, there seems to be one clear implication for manufacturers and distributors of building materials: new construction’s share of the overall housing supply has declined over the long term, and if population trends continue, housing starts may not return to its former prominence over the foreseeable future. With this knowledge in hand, most building materials suppliers and dealers should consider focusing more on the repair and remodel market to drive revenues in the current upcycle as well as when the housing market eventually turns down.
Pro and Retail Channels in LBM Distribution 2019 is Principia’s latest data product exploring the market forces and the likely impact facing industry participants in pro and retail channels for the distribution of lumber and building materials. These channels play an important role in the construction industry by (1) providing access to the marketplace for manufacturers and (2) offering builders and contractors several options to purchase many types and brands of products from the same source, while often extending credit terms to the customer.
The research and analysis provide an understanding of the market conditions and drivers affecting the future of each channel, as well as discuss various threats and trends for dealers, retailers and manufacturers to consider.
Two-Step Distribution 2019 is Principia’s latest data product exploring the market forces and the likely impact facing industry participants
in two-step distribution of lumber and building materials. Two-step distributors provide the necessary logistics to deliver products to pro dealers and retailers that have direct relationships with builders, contractors and do-it-yourself homeowners, as well as support to create demand for new products.
The research and analysis dig deeper to provide manufacturers and distributors with an understanding of market conditions and influences
expected to affect this part of the LBM distribution industry in the future.
Industry participants in building materials and construction are anxious to know where the market is headed as they plan for the coming year. The most successful organizations stay close to the market and stay aware of key market drivers and the impact on their business. Business Conditions 2019 is Principia’s annual high-level overview of the market and outlines macroeconomic and housing factors impacting the building materials and construction industry. Industry players can learn more about the following:
- What is the overall economic outlook, and how will mortgage interest rates be affected?
- Do consumers feel confident about the economy continuing to expand through 2019?
- What is the impact of technology adoption, e.g., off-site construction?
- Will technology counterbalance labor shortage and influence productivity?
New Construction and Remodeling
- How does the rate of new home construction in 2019 compare to 2014–2018 period?
- Will remodeling activity in 2019 compare favorably to 2018’s decade-high level?
To download the Business Conditions 2019 overview, click here.
Principia BuilderSeries® data products provide deep insights on how these high-level market influencers impact demand on specific residential product categories. For more information about Principia BuilderSeries®, visit our website.
It’s critical for manufacturers and distributors/ dealers of lumber and building materials to understand how distribution channels are rapidly changing. Principia’s latest additions to our data product lineup analyze the market and deliver insights on LBM distribution—specifically focusing on two-step distribution and on pro and retail dealers. Two-Step Distribution 2019 and Pro and Retail Channels in LBM Distribution 2019 explore a range of market forces and the likely impact facing industry participants. The research and analysis dig deep to understand the market condition and the drivers affecting the future of each channel, with several issues highlighted for each distribution product.
Each of Principia’s data products include a series of interactive dashboards in addition to key insights summarized by industry revenue, industry growth, customer insights, and leading dealers/ retailers and leading distributors serving each channel.
The relative position in the new construction business cycle is a topic of constant discussion within the building materials industry and used as an indicator of the market’s overall health. The long-term historical average of 1.5 million housing starts annually is a common reference point when gauging how much additional upside remains in the cycle.
From 1959 (the first year of data available from the U.S. Census) through the 2005 housing peak, starts averaged 1.55 million per year. However, the average number of annual starts over the entire 60-year period available is 1.43 million, with the most recent 30 years having only averaged 1.3 million per year. In addition, starts and starts per capita have been trending downward across 30- and 60-year periods.
Two clear observations were identified through Principia’s housing starts analysis from 1959 through 2018:
- A clear downward trend, which is particularly pronounced in housing starts per capita.
- Most recent U.S. Census numbers are above both the 30- and 60-year trend lines.
Clear Downward Trend
Both total and per capita starts have a statistically significant negative correlation with time. A persistent downward pattern in the peaks and troughs is also evident for both measures; the last four peaks and five troughs in starts per capita are lower than their precedent. Starts per capita even show a downward trend when only looking at data up until the 2005 peak, serving as evidence that this trend extends prior to the recent downturn. Total starts between 1959–2005 show a slight upward trend but were not significantly correlated with time.
Current Housing Starts Data
As of 2018, housing starts are very close to their 30-year average of 1.3 million, and above trend lines implied by linear regression over the last 30 and 60 years. The current expansion has also lasted longer and has been larger in magnitude than any in the data aside from 1991–2005. This does not necessarily indicate that a downturn is impending immediately—recent cycles have seen a few years of growth after crossing the trend line. In addition, this is just one metric and other indicators point to conditions of undersupply existing in much of the US. However, it does suggest the need for some caution when projecting how much room remains for growth.
An important caveat to drawing conclusions from this data is that it is hard to determine how irregular the most recent cycle was, and the extent to which that irregularity is skewing the 30- and 60-year trend lines downward. The contraction was certainly more extreme than any other in the available data; starts lost 73% of their value in comparison with 51% (1972–1975), 48% (1978–1982), and 44% (1986–1991) in prior contractions. However, the cycles in the 1970s and 1980s were by no means moderate—and although the expansion prior to 2005 was larger in magnitude than any preceding cycles, the rate of change was lower. In fact, the recent expansion has seen a higher CAGR (9.6%) than the 5.3% growth between 1991 and 2005.
Whatever length of runway remains for the current expansion, the decline in starts per capita seems to be a long-term trend predating the recent recession. Principia will explore the causes and consequences of this apparent trend further in the coming weeks. Up next we will consider historical data on the housing stock, how its trend compares with starts, and the ramifications for the relative importance of new construction and remodeling.
Understanding the relative strength of a geographic area for both new construction and remodeling activity provides a perspective for a building materials supplier, distributor or dealer to assess specific opportunities to pursue. The Residential Construction Vibrancy Index was developed by Principia to address this need by normalizing the importance of new construction activity and remodeling in each region according to the number of existing homes in the area. New construction is calibrated by dividing the number of new housing permits in a time period, in this case 2017, by the number of existing homes in that region. This measure provides a perspective of the degree to which the overall housing market is growing in the area as new homes are added. Existing home sales are often a gauge on remodeling activity as the seller may remodel to position the home for sale including increasing the curb appeal with new exterior improvements, painting or upgrading the interior. Alternatively, the buyer may remodel after the purchase either rolling some of the costs into the mortgage or home equity loan or paying cash to bring the home up to date. Dividing the existing home sales into the overall existing home base provides a measure of turnover, or the degree to which home inventory is changing hands in the time period.
New permits and existing home sales divided by existing homes for each Census division are plotted in the graphic below. The size of the circle reflects the number of homes in the division which enables a calibration of the size of the market opportunity for each. The national average of new homes is 1.2% of the existing base, or roughly 1.3 million new permits out of 128 million existing homes. On the other hand, over 4% of existing homes turned over on a national basis. This first observation explains why for many building product categories, the remodeling market is 3-4X the size of the new construction market. In product categories like roofing, the installed base provides a steady and stable revenue stream from roofs that wear out in a normal life cycle of around 20 years.
The graphic is also color coded by region to show distinctions among different parts of the country. By comparing a region’s new vibrancy against its existing or remodeling vibrancy, building materials suppliers can assess which job type, building product category or even customer type to pursue. For example, in the Northeast region (i.e. New England and Middle Atlantic divisions), construction vibrancy is lower than the rest of the country for new and existing jobs. However, the region has a large installed base of existing homes, providing a strong stable market for building materials, particularly in the remodeling segment.
On the other hand, the West South Central division which includes Texas has the highest new construction vibrancy index at nearly 2% of existing homes which indicates that just from new home construction, the market is expanding by 2% year over year. On the other hand, the West South Central division is right on the national average in existing homes. Of course, within a region or division, individual states or cities can be calibrated in the same manner and may show significant differences. For example, Dallas and Austin are well above the new construction vibrancy average while Houston and San Antonio are just around the average overall.
In the Midwest, both divisions (i.e. East North Central and West North Central), are below average in new construction vibrancy, with the much larger East North Central (IL, OH, MI, IN, WI) well below at just about half the national average. However, both regions are above the average for existing home turnover. In fact, the East North Central has one of the largest installed home bases of any division and represents a strong opportunity for remodeling activity.
Principia monitors homebuilding and remodeling/ repair activity through its vibrancy index across the country, and evaluates any geography down to the zip code level to compare one area to another and help evaluate business development tactics. We plan to publish periodic updates and welcome your feedback on this unique view of the market. Click here for more information on Principia’s data analytics and custom consulting focused on the building materials and construction industry.
In the building products industry, data has become increasingly more important when looking for new business and growing your company’s sales. Accurate and reliable data can help identify market opportunities whether it’s in new construction vs. remodel/ repair, single family vs. multifamily, a region of the country, or with specific customers. Developing a plan from the data can drive sales targeting and resourcing, and enable you to grow your market share faster than your competition.
Principia BuilderSeries® takes a holistic approach to build its 360° view of the market and balance supply with demand, which is validated with robust voice of customer research. Our data products look at the building materials industry at a level of segmentation and detail to identify where specific market opportunities exist for each residential building products within a product category. The foundation of each data product is built from public and private data sources.
Our perspective on industry supply and demand provides a complete picture of each residential building product category to inform your company for better decision-making. The result is the most accurate market intelligence on building products used in residential construction in the United States. Principia BuilderSeries® data products point to where’s the market today, who’s serving it most effectively and what’s the expected growth with a high level of granularity.
Uses and Benefits of Accurate and Reliable Data
Principia has identified a series of uses and benefits of Principia BuilderSeries® to drive market share, expand market coverage and target growth opportunities in the residential building products industry.
DRIVE MARKET SHARE
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TARGET GROWTH OPPORTUNITIES
Change the way your company views the residential construction market with Principia BuilderSeries® data products available for major building product categories.
Principia is pleased to announce and welcome Nancy Musselwhite as Industry Analyst. Nancy joins Principia’s analyst team delivering high quality research products to the building materials and construction industry. Nancy brings a tremendous amount of expertise within business to business primary research and managing the client experience across multiple industrial and construction markets
As Industry Analyst, Nancy’s focus is on executing and preparing topical industry reports and Principia’s BuilderSeries® research data products. She is responsible for managing and executing primary and secondary research efforts to provide critical market insights. Prior to joining Principia, Nancy was Senior Consultant with Geo Strategy Partners where she was responsible for independently leading and coordinating diverse market research and strategy projects.
Ken Jacobson, Partner at Principia comments “We’re excited to welcome Nancy to the Principia team. Her contribution will ensure continued emphasis on having industry experts engage with the market and help our clients reach their growth goals.”