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Housing Outlook is Bleak but “Green” Days Are Ahead

“I don’t think anyone is looking for housing to turn around in 2008,” said Robert Murray, vice president of economic affairs for McGraw-Hill Construction. This was the message he and other experts gave to those who attended McGraw-Hill’s Construction Outlook 2008 Executive Conference held October 25 in Washington, D.C. Murray presented the 2008 outlook for U.S. construction activity.

The bleak forecast is due in part to tighter lending conditions and high inventories, according to Murray. Many speakers addressed the inventory problem including Kermit Baker, chief economist for the American Institute of Architects (AIA) who presented an outlook for the housing and remodeling markets. He cited the statistic that inventories of vacant for sale homes ballooned—with increase over 2005-2006 estimated at 750,000 to 800,000.

“This is the problem we have to work off until things get back to normal,” said Baker.

He said we could see a recovery in 2009 but was tentative with that prediction.

Though homebuilding is in the midst of a significant downturn, Baker said, “With every day this is becoming more significant than first expected.”

Though the next few years may look bleak, he did say that the long-term housing outlook is positive as there is strong household growth (should be even greater in the coming decade than in the last), a vibrant second home market and a more efficient industry as a whole. Negatives include affordability, land-use restrictions and high energy costs.

While new construction falters, Baker says remodeling does offer opportunities. He said positives for the long-term remodeling outlook are the aging housing stock, rising land prices/energy costs and high homeowner equity levels. “Often this translates into home improvement spending,” he said.

Although the remodeling market has almost doubled since 1995, there is concern for this segment as well including:

  • A broader residential downturn shows no signs of reversing: home sales are declining and home prices are falling;
  • House equity being cashed out is slipping after very strong growth;
  • Remodeling contractors have high failure rates during downturns;
  • The share of cost recouped on remodeling projects has been declining. “That has finally gotten homeowners’ attention,” said Baker.

But again, the long-term outlook is positive.

“Once the housing market stabilizes remodeling will go up,” he said.

Baker also offered some remodeling trends, based on findings from an AIA design trends survey. He said energy-efficient and low-maintenance products are valued when homeowners select products and added that this includes “triple-glazed windows.”
And he ended his forecast with more good news. “It’s an industry that has a strong upside in the coming decade.”

Long-Term Housing Projections are Favorable
Sources of housing demand, millions of housing units
  History (1995-2004) Forecast (2005-2014)
Household Growth 12.6 14.6
Second/Vacation 2.9 1.6
Replacements 2.5 3.3
Total 18.0 19.5
Source: National Association of Home Builders and Joint Center for Housing Studies

Commercial Construction
While the last few years have seen a dip on the residential side, commercial construction has seen an upturn but that is starting to change, according to Murray.

Overall, Murray is predicting commercial building construction starts to drop to $91.1 billion from a total of $97.3 billion in 2007.
“The credit crunch that emerged at mid-2007 continues to be a major concern for construction and the overall economy,” he said. “As a result, we're now predicting downturns in the previously resilient multifamily and commercial segments, as well as continued weakness in single-family home construction.”

CLICK HERE for more on Murray’s predictions for the commercial market.

Building Materials
John Mothersole of Global Insight offered his predictions for building materials pricing.

“Collectively, pricing is projected to be flat in 2008,” he said. Following are a few key predictions:

  • Lumber: “The story here is the production cut backs. There is not an oversupply and that will help stabilize market pricing.”
  • Steel: “The next couple of months look problematic.  Price increases are coming—they’re inevitable.”
  • Aluminum: “Aluminum markets in North America look terrible. Extrusions are even worse. The problem with aluminum is that alloy metal prices have been going through the roof.”

Economic Outlook
David Wyss, chief economist for Standard & Poor’s, offered his economic outlook and says the U.S. economy has slowed after three strong years.

“Housing is the only major weakness; the rest of the economy is still growing near 3 percent,” he said.

He noted that the weaknesses aren’t found in the high-priced markets, rather the default rates are highest in the Midwest and the South. He said that employment is finally improving which is helping construction. He did, however, question whether or not the consumer can keep spending and said the saving rate will remain low.

“A risk of recession remains if further terror attacks damage confidence, while oil prices soar. Financing problems push the dollar down and U.S. bond yields higher,” he told attendees.

Green Building
Green was a topic of excitement during an otherwise bleak construction outlook for 2008. When asked, "What's the most exciting thing coming?" most agreed on one topic: "green, green, green," as Susan Kennedy, director of marketing, Sloan Valve Co., said. But that's not to say there aren't challenges associated with the green movement.

"For green, the real challenge is in [transforming] existing buildings," said Brad Haeberle, vice president, marketing, Siemens Building Technologies Inc. We're just not there."

Shortly after the panel discussion an entire session was devoted to this topic. Rick Fedrizzi, president of the U.S. Green Building Council, gave a green construction outlook for 2008. He said the key to getting buy-in for green buildings is to have a strong business case. For example focus on items such as tenant retention for green buildings and provide proven facts:

  • Students in green schools perform 20 percent better on tests than students in other schools;
  • Patients in green hospitals are leaving two and a half days earlier than patients in other hospitals; and
  • Shoppers are more relaxed in green retail stores where factors such as daylighting and improved air quality plays a role, thus they buy more.

"These human performance factors are the smoking gun when it comes to building green," said Fedrizzi.

While many may think building green has high costs he quickly addressed this myth.

"The number one mistruth is that it costs more to build green. There is study upon study that proves that for the first two levels of a LEED building can be constructed for not a penny more," he said. "A $4 investment in building green nets a $58 benefit per square foot over 20 years."

He also pointed out that LEED buildings can reduce carbon omissions by 40 percent. "This is what it's all about," he said.
"We are in the midst of the biggest societal shift since World War II … We're humans. We want to address these problems. We don't want to leave a legacy of filth."

According to Murray, Washington D.C. is leading the way in green building. In fact, the new Nationals stadium in Washington, D.C., is attempting to become the first baseball stadium to earn LEED certification. Green construction is expected to continue its growth. The tipping point, Murray says, is expected to come in a market shift over the next three years. By 2009, 80 percent of corporate America is expected to be engaged in green at least 15 percent of the time, and 20 percent will be engaged in green 60 percent of the time.

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