2020 Forecast

July 21st, 2021 by Nathan Hobbs

As the Economy Dips Below Clouds, Experts See Only a Slight Change in Altitude

By Drew Vass

If economic and housing experts could deliver a single message to the door and window industries about 2020, it might be: Everybody just remain calm.

Why? For starters, the economic experts interviewed for this article agree that while there might be some turbulence—in the near term at least—a recession is unlikely. The oxygen masks aren’t going to fall and you’re still free to roam about the cabin.

With issues such as trade wars, labor shortages and affordability lingering, there are economic risks at work. But, propped up by a stellar jobs market and consumer confidence, it’s unlikely, they say, that a major downturn will strike in the year ahead.

Furthermore, for an industry that’s linked to housing—with or without a slowdown in the economy— some experts feel that due to a backlog of need, the residential construction industry should be relatively immune from all but the worst circumstances.

“As I look at the crystal ball here, right now in 2020 I’m not seeing an acceleration until some of these other issues are cleared up, but I don’t see a collapse either,” says Cris deRitis, deputy chief economist for Moody’s Analytics. Instead, he sees “kind of a middle of the road, steady as she goes type of forecast,” as the single-family market deals with issues like affordability and labor shortages.

At the same time, deRitis and other experts agree that there are indications that following the last collapse in housing and the Great Recession, Americans have learned their lessons.

“As we look at the economy today, what is nice is that I think there’s a vigilance,” deRitis says. “Everybody’s kind of looking for that weak spot—even the banks and lenders.”

As a result, these days consumers are living more within their means, he says. “Many of them learned their lessons last time around, or they saw their friends or families get into trouble. And so perhaps younger generations, particularly, might be a little more reticent to take on a lot of credit,” he explains.

As a result, the growth rate of consumer credit remains in line with the economy, while banks and lenders now restrict lending more tightly.

Walking Tall

The primary driver keeping us from a recession includes consumer optimism, experts say, which is driven by a strong jobs market, as well as a generally positive outlook for the economy ahead. Over the course of 2019, the net share of Americans who said they aren’t concerned about losing their jobs rose—reaching more than 80%, according to the Fannie Mae Home Purchase Sentiment Index. Unemployment has held at historic lows—below 4% nationally and across the vast majority of regions. In a time when
people feel confident that they won’t lose their jobs and rest assured that they can find another, they’re more comfortable borrowing and spending. The factors driving that swagger are expected to slow a bit in 2020, including to some degree the labor market, but overall they’re expected to remain strong enough to keep the economy and consumers going, reports suggest.

That’s not to say there aren’t risks.

“If the trade war escalates and suddenly we’re seeing higher prices, there are all sorts of reasons why consumers might start to pull back on their spending,” deRitis explains. “If that happens, that’s a model for a recession.”

Other factors include events in the general financial markets, like a stock market correction or a leveraged loan meltdown. But experts interviewed for this article feel the odds for those occurrences remain relatively low. Even then, if a recession struck, the severity and duration would be nothing like the last one, some suggest. Richard Branch, chief economist for Dodge Data & Analytics, concurs, expecting a slight slowdown in 2020 as a mild pullback after economic recovery, but nothing drastic. With that adjustment, Branch and other experts say they expect new construction and remodeling to slow a bit, but to go on fairly unencumbered by short-term changes.

“There should still be a decent support for both remodeling and new construction on the residential side in 2020,” Branch says. “In the single-family market, I would say that while we do anticipate the economy slowing, we don’t expect anything like what we saw in 2007-08. This will be just a fairly mild pullback.”

As a key indicator, gross domestic product (GDP) began to slow slightly over the course of 2019, Branch reports, to around 2% growth, compared to 3% in 2018. In housing, the single-family market finished the year 3% down, he says, and will be slightly lower yet in 2020—to the tune of around 5%.

Driven by Need

Even when the next recession comes, history suggests that doesn’t mean demand for housing will tumble. According to Harvard University’s Joint Center for Housing Studies, even with three recessions occurring between 1980 and 2007, household growth averaged 1.3 million annually, dropping below one million only once over that same period.

For the foreseeable future, if nothing more, the housing market should remain driven by sheer necessity, some reports indicate. Heading into 2019, Harvard’s research estimated that over the next 10 years young adults will add about 20 million households. At the same time, other studies show that construction has failed to keep pace with household growth for eight years, creating a backlog.

“I think at the end of the day, demographics drive housing demand and when you look at the millennial age group, it’s the largest age group in the U.S. right now,” Branch says. “Their average age is in the mid to low 30s—just about that transition time from the rental side to the purchasing side.”

Indeed, data gathered by NAR in 2019 shows that millennials make up the largest number of homebuyers, at 37%. And there’s reason to believe that they’ll drive more than just demand for new housing. Meanwhile, these days, the largest number of buyers purchase homes built prior to 2000 and plan to stay put for 16 or more years. Doors, windows and siding rank among the top environment-friendly features they consider important.

If there’s a downside for doors and windows in today’s purchasing habits, it might be in the fact that home sizes have trended smaller, with the majority of homes purchased falling between 1,500 and 2,500 square feet.

The Harsh Truth

That’s not to say that the single-family market can whistle its way along in the face of a slowdown, relying on millennials.

By all accounts, 2018 represented a cyclical peak— maxing out in the single-family sector at $230 billion. The high for single family starts was 833,000 units. Activity in the single-family market slowed over the course of 2018, continuing into the first quarter of 2019. As a result, confidence among builders waned slightly, according to the NAHB/Wells Fargo National and Regional Housing Market Index (HMI), but returned over the course of 2019—especially regarding outlooks for single family sales.

Much of that confidence hinges on the ability of builders and developers to keep homes within financial reach of millennials and other buyers who—even with a strong jobs market—struggle to achieve financing.

According to a National Association of Realtors (NAR) survey in late 2019, 63% of people believed it was a good to time to buy a home. But the fact is—not everyone can afford to do it.

According to a separate NAR study released in September 2019, the majority of homebuyers said that they found it somewhat to very difficult to qualify for sufficient mortgages. Already faced by such things as labor shortages, lot shortages and zoning restrictions, it comes as no surprise that, according to the perspective of homebuilders, affordability remains the major issue hurting them and buyers. Meanwhile, data backs those perceptions. After around a 30% drop during the last housing crash, home prices have steadily climbed since 2011. Over the five-year period following 2012, the median price per acre for land used for single-family construction rose from $159,000 to $203,200. In the year that followed, median sales prices for homes increased from $253,800 to $261,600.

Other data shows that while in 2012 more than three quarters of new and existing homes were listed at prices that were considered affordable, that number plummeted to nearly half by 2018.

Not surprisingly, the share of new mortgages with total debt-to-income ratios above 43% has increased in recent years. In other words, buyers are teetering on their ability to purchase new homes and even the slightest change could be detrimental. When it comes to interest rates, for instance, data shows that a 1% increase (from around 3.6% to 4.6%) would price over four million would-be buyers out of the market.

Silver Linings

If there’s an upside to rising home prices for the door and window market, it might include a steady need for replacement, as studies indicate that price increases have helped to propel the demand for remodeling. Increasing values help to generate equity for homeowners, also increasing access to equity-based loans used for improvement. According to a 2019 report published by Harvard University’s Joint Center for Housing Studies, “The share of replacement projects is likely to remain high in the coming decade as the housing stock ages and the number of older homeowners continues to grow.”

Already, the remodeling market has followed a steady trajectory over the past 10 years toward a total of $500 billion—marking a 50% increase. With nearly 80% of the nation’s housing (137 million homes) clocking in at a minimum of 20 years old and nearly 40% at least 50 years old, some experts suggest that an upward trend in remodeling is expected to hold.

Another driver of demand for remodeling includes rebuilding after disasters. As a share of overall improvements, this type of spending increased more
than 6% over the past decade.

So far as how issues of affordability might be overcome, research shows that even the slightest amount of assistance makes a difference. According to a special study conducted in 2019 for HousingEconomics.com, a $1,000 increase in the median cost for new homes would price out more than 127,000 households. By that token, if you’re thinking about offering rebates, 2020 might just be the year to do it.

Drew Vass is the editor of Door and Window Market [DWM] magazine.
dvass@glass.com

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