How long? How deep? Eric Belsky gets asked those questions about the housing industry's slump every day, and given his role as executive director of Harvard University's Joint Center for Housing Studies, he's expected to know the answers. But Belsky doesn't know.
In his Sept. 26 presentation in Chicago at the American Housing Conference, which was hosted by PROSALES' parent company, Hanley Wood, LLC, Belsky could only say it's too early to tell whether the downturn will be short and sharp or longer-lasting and ultimately more painful. What is clear, he said, is that builders are responding by slowing production at least 10% in previously overheated states like California, Arizona, and Florida in an attempt to cut the six-month backlog of unsold homes. The cuts haven't been as great elsewhere, but by 2007 Belsky expects the number of housing starts to decline roughly 10%, to about 1.6 million, from the 1.8 million starts expected this year.
“The builders hold a lot of cards to their own future,” Belsky said. Remodeling activity will stay at current levels for a while, but ultimately it will slump too if construction doesn't turn around by, say, late next year.
For pro dealers on the LBM supply highway, then, this is the time to downshift, tap on the brakes, and keep close watch on whether the traffic ahead has stopped. Tom Flynn, president of Hanley Wood Market Intelligence, suggests you keep an eye on the local housing inventory numbers, the jobs and wages picture, and both the raw numbers of housing permit issues and how those issuances compare with population growth. Watch home prices as well, both locally and nationally, for their effect on consumers' sense of well-being, Belsky adds. He says a more than 5% drop in prices nationwide could lead to a purchasing slowdown that could cut the annual gross domestic product by half a percentage point.
California and Nevada have been two of the nation's hottest housing markets these past few years, and thus are among the states in danger of suffering the most. Don Haid, manager of raw materials and industry analysis for Weyerhaeuser, says the average Southern California pro dealer could possibly face a 25% drop in sales volume through 2007. “Housing starts have entered what is really a normal cyclical decline,” Haid said in late September during the Lumber Association of California and Nevada's 30th annual Second Growth summer conference in Valley Center, Calif. “We're not outside of the historical norm—we're just in unfamiliar territory compared to the tear that we have been on.”
Haid also indicated that additional industry merger and acquisition activity would be a reasonable assumption. “One of the ways to maintain growth in a slowing market is through acquisition,” he said. “So there's opportunity here for some consolidation, for some people being sweated out of the business.”
Meanwhile, in Washington, economists at the NAHB forecast on Sept. 28 that housing starts will drop 11.5% this year and 11.7% in 2007. “We need a period of below-trend performance to work off excess inventory and improve housing affordability,” David Seiders, the association's chief economist, said in a statement. Nariman Behravesh, chief economist for Global Insight, added that a soft landing of the U.S. economy is “no longer in the cards.” He believes the gross domestic product, expected to climb 3.4% this year, will grow just 2.2% in 2007. —Reporting by Chris Wood and Craig Webb