Sometimes when the situation is really, really bad, the only positive thing you can say is that someday you'll have a great story to tell your grandchildren.

"Grandpa, Grandpa! Tell us again how the Great Crash of 2008 happened!"

"All right, kids. Actually, it was all a misunderstanding. It never occurred to lenders that if you loan money to people who can't pay it back, they won't. Likewise, investors didn't realize that if you pay lenders to loan money to people who can't pay it back, they will. And borrowers didn't understand that they'd have to pay the money back. It was in the fine print."

"Grandpa, Grandpa!"


"Are people smarter now?"

That certainly remains to be seen.

When ProSales was launched 20 years ago, housing was three years into a five-year slide that finally bottomed out with starts nearly 44% below their 1986 peak. As of June 2009, annualized housing starts were 582,000, nearly 72% off their peak of 2.07 million 2005. That's worse than 1979-82 (-47%) and 1972-75 (-51%). Not counting 1941-44 (-80%) when the industry was shut down by World War II, it's the worst crash since 1925-33, when starts plunged over 90%.

This downturn is the undisputed heavyweight champion of our lifetime–or at least we hope so. The problem is that we're not sure, and there's a reason.

In the good old days, doomsayers stood on street corners with signs reading, "The End Is Near." Today we have cable TV and the Web. Everyone's a pundit and the predictions all seem authoritative: Home prices will ultimately fall 50% (says the author of a book on how to profit from hard times), the next boom won't come until 2020 (according to a company that sells foreclosure leads), or there'll even be complete economic collapse (source: any pundit who sells gold).

We're Not Dead. Here's a reality check. According to World Bank data, the United States still accounts for 25% of world gross domestic product and 25% of global manufacturing output; China isn't even close. The Chicago Federal Reserve says the primary reason we're losing manufacturing jobs isn't offshoring, it's because productivity has been rising at an incredible average of 3% per year since 1949. That's no consolation if you lost your job, but it's hardly a competitive disadvantage.

Moreover, the World Economic Forum's 2008 Global Competitiveness Report again ranked the U.S. No. 1 in overall economic horsepower, barely ahead of Switzerland, Denmark, and Sweden but well ahead of China (30), India (31), and Russia (51). If we're to become a second-rate power, it's up to Switzerland.

That's not to say our problems aren't serious. But most of the world still agrees that the U.S. will lead the way out of this recession, and in seven of the past eight downturns, housing led the U.S. out.

But there is a catch: Every severe downturn in the past 60 years has triggered a major shift in the competitive landscape. In the late 1940s, the advent of tract building created the first megabuilders. The 1972-75 crash broke down resistance to prefab assemblies, facilitating the rise of specialty distributors and component manufacturers.

The crash of 1979-82 established home center warehouses as a channel segment distinct from lumberyards and home centers. The downturn of 1986-91 led to the emergence of integrated suppliers providing turnkey materials and labor.

There's a fair chance this downturn will also reshape the industry; the obvious question is how. One overriding theme is emerging that could dictate strategies throughout the channel.

Next Customer, Please. New households are the engine driving housing demand, and that's good news. As the Harvard Joint Center for Housing Studies notes in State of the Nation's Housing 2009, "household growth in 2010-20 could total as much as 14.8 million or remain closer to 12.5 million (nearly the same as in 1995-2005)." Demand next decade should match or even exceed the last one.

The caveat is that we're also entering a demographic shift unlike anything you've seen in your career. Since the 1970s, the market has been dominated by the Baby Boom generation. Why? Because the 78-odd million Boomers born from the mid-1940s to the early '60s were the largest generation in U.S. history. As entry-level buyers, they drove multifamily construction to its highest levels ever in the 1970s and 1980s. In the last boom, middle-aged Boomers drove demand for move-up suburban homes.

Now Boomers are retiring and downsizing. A new generation is in its move-up years, but Generation X is the product of a baby bust during the 1960s and '70s, so its numbers are smaller. At the same time, the oldest Millennials are now in their mid-20s and just starting to enter the market. By most estimates, the Millennial generation is as large as the Baby Boom cohort.

Throw in the fact that Americans are a little poorer than they were before the crash, and all signs point to affordability as the major theme of the next cycle. That means smaller and simpler single-family homes, more multifamily construction, and remodeling for entry-level buyers and retirees.

Builders faced a similar situation in the mid-1940s when the market was flooded with GIs returning from World War II. The result was the introduction of assembly-line methods. At a time when median household income was $3,300 and the median new home price was $11,000, Levitt & Sons sold homes for a flat $7,990, lowering the cost from 3.3 times income to just 2.4.

The Whole Iceberg. Price pressure forces innovation and will likely do the same this time. That means components will probably continue to gain market share vs. stick framing, but prefab may be just the tip of the iceberg. While manufacturing averaged 3% annual productivity gains since 1949, the rate actually accelerated in the 1990s. The reason was supply chain integration.

Some don't like it, but the research says the reason jobsite productivity lags behind manufacturing is our failure to embrace supply chain management (SCM). But SCM may be good news. Turnkey materials and labor also reduce cost, which makes dealers the logical hub of SCM systems encompassing not only procurement and logistics, but scheduling and production. It's a leap, but watch it closely. A few dealers are already exploring it.

Much closer to home is the remodeling market. There are more than 130.4 million existing homes in the U.S.; the average age is 35 years, and 50% of all projects are non-discretionary. Some dealers are reaching out to remodelers and DIYers; others are leveraging their installed sales expertise to take on replacement projects.

The opportunities are endless. Single heads of households and DINKs (double-income, no kids) are at all-time highs, and neither has time for DIY. Boomers overwhelmingly want to stay in their homes; they'll need aging-in-place retrofits. As oil prices rise, so will demand for energy retrofits. Foreclosed homes go to pot in a New York minute and will need repairs before they can be sold.

By all accounts, the last boom was a once-in-a-lifetime experience. Consider it a windfall and set your sights on the next cycle; Grandpa is still going to live happily ever after.

Four Trends To Bank On

1. Home improvement takes the driver's seat. Expect a surge in remodeling once the economy stabilizes. Home improvement spending already nearly equals residential new construction.

2. Quality makes a comeback. Briefcase builders like to delegate, and that's an opportunity to make yourself indispensable–if you have the expertise. Dealers often find their veterans have significant gaps in their knowledge.

3. Urban renewal gets a facelift. You'd better have the trucks, the inventory, and the bedside manner to handle infill and tear-down projects in established neighborhoods.

4. Green goes for the gold. However the green building movement evolves, energy-efficient construction will be market-driven. Look for tighter building codes, higher product standards, and more proprietary approaches to reduce dependence on skilled labor.

Greg Brooks, president of the Building Supply Channel Inc. in New Albany, Ind., is a market analyst and strategy consultant with 40 years' background in the construction supply industry. Brooks was a regular contributor to ProSales from 1990 to 2001 and served as its editor from 1995 to 1999. Contact him at [email protected].