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Repair and Remodel Expected to Drive Future Growth in Residential Construction

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

  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.
  2. 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.
  3. 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.

Housing Starts: Is 1.5 Million Still Relevant?

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:

  1. A clear downward trend, which is particularly pronounced in housing starts per capita.
  2. 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.

Other Considerations
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.

 

Principia’s Residential Construction Vibrancy Index Provides Insights into Specific Opportunities for Building Materials

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.

Using Building Products Data to Drive Sales Growth

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

 EXPAND MARKET COVERAGE

TARGET GROWTH OPPORTUNITIES

Change the way your company views the residential construction market with Principia BuilderSeries® data products available for major building product categories.

Click here to learn more about Principia BuilderSeries® or request a demo today.

Principia Consulting Continues to Expand its Building Materials Analyst Team

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.”

 

Hurricane Harvey Impact for Building Materials Suppliers Hits $1.8 Billion Across Six Major Products

In the aftermath of Hurricane Harvey in Houston and Beaumont, Texas, the cleanup and repair efforts are just beginning. Principia previously reported on the need for suppliers, distributors and dealers to be prepared to move substantial stocks into the area for the rebuilding effort.

Additional analysis of our estimates regarding the value of building materials required for this effort has been completed. Overall, just under 1.8 million housing units exist in the Houston and Beaumont areas and for each house an estimated $18,000 of materials (excluding labor) will be required in the categories shown in Figure 1 below.

Figure 1: Houston & Beaumont – Total Projected Product Replacement Demand (Factory Gate $MM)

Source: DemandBuilder® from Principia

Latest estimates are that a minimum of 100,000 homes were damaged or destroyed which translates into a minimum of $1.8 billion of product needed in the area. Of course, this estimate may be higher or lower based on the final number of homes and the extent of the damage as some homes will need a complete rebuild rather than replacement. Further, home interior product categories will also need to be considered, including plumbing, HVAC, flooring, cabinets, countertops, paint, trim and millwork.

All industry participants are encouraged to monitor the specific areas where assistance is most needed. Unfortunately, next up will be assessing the damage inflicted upon Florida and the neighboring states based on Hurricane Irma which is still underway at the time of this writing.

Click Here to learn more on Principia’s estimates on the impact on building material demand from storm damage.

Hurricane Harvey’s Potential Impact on Building Materials Demand

Hurricane Harvey has set records for total rainfall and overall damage of residential housing and commercial  buildings. Unfortunately, the total economic impact has yet to be realized but the total damage of Hurricane Harvey is estimated to fall between $70 and $108 billion. Rebuilding will take years, similar to other devastating storms such as Katrina, Sandy and Andrew.

So, what does this mean for the building materials industry? How can suppliers, distributors and dealers support the effort over the longer term? One step is to understand the scale of rebuilding required and have sufficient supply of building materials stocked and accessible to the Houston and Beaumont areas. Principia Consulting has compiled an analysis of the level of building materials inventory that may be needed in each product category for residential home rebuilding.

Overall, there are 1.8 million housing units (single and multifamily) in the Houston and Beaumont Core Based Statistical Areas (CBSA) with an estimated total replacement value of $474 billion. Of course, not every housing unit will require replacement but the total existing housing stock gives pause to consider the overall potential level of building required. The detailed map for these two CBSAs in Figure 1 depicts the relative total replacement value of housing at the county level.

Figure 1: Houston & Beaumont CBSAs – Total Housing Replacement Value (in $MM) by County

Source: DemandBuilder® from Principia

These replacement value housing figures can be translated into demand for specific building product categories with Principia’s DemandBuilder® data products. DemandBuilder® Roofing reveals an estimated 54.5 MMSQ of existing roofing in the Houston-Beaumont areas with a replacement value of $3.7 billion in materials alone. The bulk of this volume is in the Harris County area with 35.4 MMSQ valued at $2.4 billion. Although these figures represent 100% replacement, a more complete assessment of the impact on material demand will only be finalized after the complete damage of the storm has been determined. For example, if a quarter of the roofs in Harris county need to be replaced, this would represent 8.9 million squares or $600 million of roofing that would be needed.

Further, as flood damage reports become available, Principia will pinpoint specific estimates of roofing demand at a zip code level to focus on the hardest hit areas. A detailed map of replacement roofing potential by zip code is shown in Figure 2 as an example.

Figure 2: Houston & Beaumont – Roofing Replacement Demand (in $MM) by Zip Code

Source: DemandBuilder® from Principia

Principia is in the process of developing detailed assessments for additional categories including lumber, siding, insulation, flooring, windows, doors and weather resistant barriers for the Houston and Beaumont CBSAs and other regions in Texas and Louisiana affected by the storm.

Contact Principia for further detail on projections for building materials demand within the storm’s affected areas.

Multifamily Housing Sector Weakens

Annual United States housing permits in 2016 experienced a slight -0.1% decline from 2015 to 2016.  This overall decline is a deceleration from the 14% CAGR between 2010 and 2015. The first decline in multifamily permits since 2009 was accompanied by a low growth in single family in comparison to recent years. Annual growth for multifamily and for single family from 2015-2016 was -9% and 10% respectively, compared to a CAGR of 31% for multifamily and 14% for single family from 2010-2015.

Growth Patterns
Two important market patterns evolved in 2016.  Single family growth rates varied from 2% in the Southwest to 13% in the Southeast.  Overall single family experienced a 30% reduction overall from 14% CAGR from 2010-2015 to 10% in 2016.  The largest single family growth was experienced in the Southeast at 13% and the West with 11% growth.  The largest increase occurred in the Southeast with the number of permit units increasing from 245 thousand in 2015 to 271 thousand in 2016.

Multifamily unit construction grew from 2010–2015 with a 31% CAGR but declined at a rate of -9% in 2016. The Northeast was a major contributor to the multifamily permit decline.  In the Northeast, multifamily permits dropped significantly by -49%, while single family only increased by 3% leading to an overall decline in the region.

Staying abreast of changing trends in housing permits is a critical strategic consideration for manufacturers and distributors of building materials. The recent 2016 housing permit data shows a shift in multifamily housing suggesting a potential change in terms of product mix and account targeting. Comparing 2016 growth with recent trends additionally suggests the Southeast and West regions will drive demand specifically for companies heavily focused in new single family construction. These growth rates however, indicate a slowing on the single family side as well and warrant an evaluation of the impact on your product demand.

HOUSING PERMITS SUMMARY
A summary of additional findings titled Housing Permits 2016 – Impact on Building Materials Demand is available for download.

DOWNLOAD NOW

 

Residential Construction: Top 10 Areas Experiencing Growth in the United States

While not quite a secret – the word is out: single family home construction continues its growth trajectory. Chief economists with the Associated Builders and Contractors (ABC), the American Institute of Architects (AIA) and the National Association of Home Builders (NAHB) in August 2016 predicted single family construction growth for the next year, as well as industry growth overall.

NAHB Chief Economist Robert Dietz explained that single family construction was increasing by more than 10 percent while multifamily production levels were slowing down. Low interest rates for home mortgages are one factor, he said, in keeping the housing market moving forward. Multifamily construction starts are down 7 percent from October 2015 to October 2016, compared with a 7 percent growth in single family units based on Principia’s view of Census data.

Principia’s analysis of Census housing permits reveals that multifamily growth is down significantly from 2015 specifically for buildings with five or more units while single family remains on an upward trend.

The largest drop in multifamily growth has occurred in the Middle Atlantic region followed by the West South Central region while single family regions experiencing the greatest growth include the East North Central, East South Central and New England regions, as shown in the table below.

Top 10 Areas for Growth – Single Family
In addition to assessing regional demand, Principia’s analysis also revealed the following top 10 states for single family growth year over year:

  1.      Florida
  2.      Georgia
  3.      North Carolina
  4.      Washington
  5.      Utah
  6.      Tennessee
  7.      Ohio
  8.      California
  9.      Idaho
  10.      South Carolina

Interestingly, the National Association of Realtors (NAR) said that demand for new homes is strong in many areas of the country – but that the number of building permits for new single family residential construction is not keeping pace. An NAR study from 2013-2015 of 171 metropolitan areas in the U.S. compared new home construction relative to job gains in these areas. The findings indicated that markets in the West make up half of the top 10 areas in need of more new single family homes. These areas are:

So, what’s driving this growth? More jobs, higher salaries, an affordable cost of living and a stronger economy. For instance, Dallas added nearly 100,000 new jobs in 2015, according to an article in Forbes online, “Building Boom Towns.

Top 10 Areas for Growth – Multifamily
Although multifamily is down overall Principia’s analysis of Census housing permits as of October 2016 reveals the following top 10 states for multifamily growth include:

  1. Colorado
  2. Illinois
  3. Georgia
  4. Arizona
  5. Nevada
  6. Oregon
  7. Kentucky
  8. Tennessee
  9. Iowa
  10. Kansas

FreddieMac’s Multifamily Outlook 2016  offers some insight into the lower numbers in multifamily construction. The report stated that an increasing number of renters becoming homeowners was a major factor in decline, with home ownership increasing significantly last year. One factor was deciding to buy before interest rates rose. A better economy and job growth also factored into this.

Other issues facing developers of multifamily units include affordable rent for occupants, an increase in construction costs – some report costs have increased 65 percent since 2010, fewer skilled tradesmen, and an increasing hourly construction worker wage.

Why These States?
Multiple states on both top ten lists regarding housing permits are also ranked as the top states to move into according to a yearly survey conducted by United Van Lines. These states include Florida, North Carolina, South Carolina, Washington, Nevada, Arizona and Oregon. The most popular reasons across the board according to the survey results were job changes and retirement. Forbes published a list of the Best Places to Retire and “The Best Cities for Millennials in 2016 earlier in 2016 and again several of these states make the top ten.

Market Effect
NAHB said that it’s not just the number of single family residential home constructions that is growing – but also it’s economic growth and an increase in the number of jobs. In its post on What Building 1,000 Homes Means to the U.S. Economy, it was stated “building 1,000 average single family homes generates 2,975 jobs and $111 million in taxes and fees for all levels of government.”

Multifamily housing impact on the U.S. economy is not as significant as single family as indicated in the two tables below from the NAHB:


What Does This Mean for Building Product Manufacturers, Distributors and Dealers?
The outlook is still strong for both single family and multifamily construction with single family expected to have a higher growth rate and more impact on the overall economy. Single family homes typically have unique construction amenities not found in multifamily homes. In addition to decks, oversized doors and luxury millwork, Builderonline shares some additional amenities that single home homes may include:

  •        Floor to ceiling windows
  •        Covered outdoor rooms
  •        Spa-like master baths
  •        Grand entries
  •        Larger garages
  •        Technology-friendly home; e.g., smart technologies

At the same time, building product demand used in single family homes versus multifamily homes within the growth areas could see a slight increase including:

  •        Asphalt shingles
  •        Floor tiles and solid wood flooring
  •        Decking
  •        Green building
  •        Trim, both wood and PVC
  •        Solar panels
  •        Smart home technologies, including security systems

A recent article posted on upcoming real estate predictions stated “inventory is currently down an average of 11% in the top 100 metropolitan markets nationwide.” The article also points out that again Millennials and Baby-Boomers will drive much of the home buying activity in 2017, leading to great anticipation that 2017 will be a good year for new single family home construction.

Click Here to learn more about the residential construction market and how Principia can assist with identifying product demand.

Multifamily Housing Sector Growth Narrowing

Annual United States housing permits in 2015 grew a healthy 12% year-over-year, a slight deceleration from the 15% CAGR between 2010 and 2014. Multifamily growth continued to outpace single family for the nation as a whole, though this gap narrowed. Annual growth for multifamily and for single family from 2014-2015 was 18% and 9% respectively, compared to a CAGR of 27% for multifamily and 9% for single family from 2010-2014.


Growth Patterns

Several important regional patterns intensified in 2015. West and Southeast regions experienced the highest 2010-2014 single family CAGR and were also the only two regions where the single family growth rate increased in 2015. In the Northeast, multifamily permits have grown significantly faster than single family permits in recent years and 2015 was no exception with a huge 71% increase in multifamily which offset a decline in single family permits.

Several notable divergences from recent trends were also evident. The Southwest region, which was the second strongest in terms of overall growth from 2010-2014, saw a notable slowdown in 2015 and was essentially flat in both single family and multifamily units. Similarly, the Midwest region saw a slowdown in growth for both unit types. The Northeast jumped from fourth to the top spot in terms of overall permit growth, though as mentioned this was notably driven by multifamily permits. The Southeast region also picked up steam in 2015, outgrowing the Southwest and West regions and adding to its substantial national lead in terms of total annual permitted units.

Staying abreast of changing trends in housing permits is a critical strategic consideration for manufacturers and distributors of building materials. The recent 2015 housing permit data shows multifamily housing continues to grow faster than single family, suggesting a potential change in terms of product mix and account targeting. However, an evaluation of recent data highlights the gap in growth rates is narrowing and potentially becoming more regionally focused, particularly in the Northeast. Comparing 2015 growth with recent trends additionally suggests the Southeast and West regions will continue to drive demand for companies heavily focused in new single family construction, as single family growth rates picked up steam while other regions were flat.

Housing Permits Summary 

A summary of additional findings titled Housing Permits – Potential Impact on Building Materials is available for download.

DOWNLOAD SUMMARY NOW

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