2021 OutlookAugust 18th, 2021 by Nathan Hobbs
Doors and Windows Remain an Essential Part of Economic Well-Being
By Drew Vass
With cases of infection and deaths from COVID-19 rising in the first weeks of January, 2021 began on a note that sounds painfully similar to most of last year. But the new year also brings with it a few happy notes. Slowly but surely, vaccines are rolling out—first to healthcare workers and nursing home residents, then to “essential workers,” in many cases including (if they choose) employees of door and window companies. Moving ahead of individuals aged 65 and older, and those with pre-existing, at-risk medical conditions, you might be tempted to think, “But I just make doors and windows.” Before you make your final decision, however, there’s something you should know.
According to leading experts, doors, windows and millwork are all part of an intricate web of products and services linked to the one thing that is so far holding up the U.S. economy: housing. Amid one of the darkest periods in U.S. and world history, the doors and windows your company manufactures, ships, sells and/or installs, help not only to keep you and your family fed, but by keeping construction going and people moving, they also contribute to the economic well-being of the nation—right when we most need it.
An Economic Hero
“Housing was the bright spot of the economy in 2020,” says Robert Dietz, chief economist for the National Association of Home Builders (NAHB). Other experts agree, leading some to label housing a sort of “economic hero.” They also predicted those circumstances—including in [DWM]’s 2020 outlook article (published ahead of the pandemic). In fact, despite the circumstances that followed, they did so with astonishing accuracy.
“Back in March and April, it really did look like the market was falling out from under us and that 2020 would be a very negative year for housing and remodeling,” says Abbe Will, associate project director for Harvard Joint Center for Housing Studies’ Remodeling Futures program.
In March alone, the economy shed 1.4 million jobs, as the unemployment rate began its historic climb, temporarily reaching nearly 15%. “But we saw a shift,” she adds. “Over the summer, there was a real divergence in terms of how households were handling the economic downturn from earlier in the year.”
In what has been a pain point for construction and real estate, the housing sector was under-built, Dietz says, and therefore had a lot of “potential energy.” For this reason, even before the first cases of COVID-19 surfaced, Our thinking was that if some sector of the economy fell into recession, interest rates would go down and home buying would go up,” he says. Both did just as he and other experts suggested.
Year over year, new single-family home sales were 17% higher in the first nine months of 2020—rising to rates not seen since April 2006—leading GDP growth to rebound in the third quarter to an annualized 33.1%. The results were, “stronger than what had been assumed in previous forecasts,” Dietz says.
When asked if she is surprised, “All of me is surprised,” says Kim Kennedy, director of forecasting for Dodge Data and Analytics, regarding how well residential construction has so far held up amid a pandemic. Looking ahead, “I’m a little bit nervous about the start of the year,” she says about 2021, adding, “I think it could be a little bit rocky.” But once vaccines are more widely distributed, “I think things will visibly start to change and we’ll see a lot of growth from where we are right now,” she says.
A Slow, Turbulent Climb
“While the first quarter may be the exception to the rule,” overall, Kennedy and other experts agree that 2021 should be a positive year for construction. If their predictions are accurate again, it should also be another strong year for building products. But in a period that Will admits has “presented a lot of challenges for projecting in the industry,” and more broadly, each expert is also quick to add caveats.
With additional stimulus forthcoming, the economy is expected to return to stronger growth starting in second quarter 2021, they say, and to remain in recovery—so long as additional stimulus funds are provided as needed.
Nonfarm payroll growth is expected to remain slightly positive, and the unemployment rate should hover near 8%, forecasters say, continuing downward—so long as we avoid future shutdowns.
Quarterly GDP growth is expected to be above 3% (annualized) for the latter three quarters of the year— so long as housing and other sectors perform as expected.
If the final months of 2020 are indicators, all of those caveats should be kept at bay. According to statistics provided by the National Association of Realtors (NAR), in the last part of the year, demands for housing continued to outpace availability. As a result, realtors ranked traffic as “very strong” and properties sold, on average, within three weeks. Gay Cororaton, NAR’s director of housing and commercial research, says that among 23 real estate economists surveyed, “The consensus is heartening.” This year, median forecasted growth rates are expected to clock in at 3.5%, she says, which is roughly the level seen prior to the pandemic. Analysts for Federal Home Loan Mortgage Corp. (Freddie Mac) predict that, after increasing to 6.2 million in 2020, home sales will decline slightly to 6.1 million in 2021. At the same time, home prices are expected to moderate to a 2.6% increase for the year. With single-family starts for the first time ever more or less matching the rate of home sales, residential construction is expected to once again beat the odds, mostly out of sheer necessity. As a result, the momentum that Dietz saw heading into 2020 remains. In their 2021 forecasts, Dodge analysts say they expect total construction starts to gain modestly at 4%. Meanwhile, at NAHB, “We’re big believers in the long-run homebuilding trend,” Dietz says. “We feel that we’re getting back on the trend line that’s been in place in home building since roughly 2011.”
According to Dodge’s recent outlook, starts will climb 7% in 2021, “to a total of $254 billion (928,000 units) after being one of the few sectors to show an increase in 2020 when single family starts will rise an estimated 4% to $239 billion (876,000 units).” Single family totals in 2021 “will be the highest since 2007,” the firm’s analysts predict.
In the end, about the only part of single-family housing that’s expected to take a hit in 2021 includes the rental market, as Cororaton says that among those hardest hit by the economic impacts of COVID-19 are restaurant workers and other service industries, which she says make up the vast majority of renters. At the same time, those who have survived shutdowns and cutbacks may graduate to ownership, she says, as, “Mortgage rates are at historical lows, at 2.7%, so nationally, median monthly mortgage payments are lower than median rents.”
Mortgage rates have fallen to unprecedented lows, Kennedy says, adding, “I mean, 2.7%. How many people can say no to that?” The opportunity has led many to make the leap into ownership, “regardless of everything else that’s going on in the world,” she says.
As the Federal Reserve vows to keep the prime lending rate as close to zero as possible in the months ahead, experts say those same low rates have also kept builders willing to start projects. Even with economists predicting that lending rates will have to rise—at least a little this year—analysts for Freddie Mac forecast they will remain at around 3%. At the same time, experts are quick to point out that interest rates are just one of the factors keeping housing in action. As the pandemic hung around—and worsened—Americans found other reasons to move and renovate, changing their homes to match new circumstances. That’s expected to continue for the foreseeable future.
One obvious contributor includes the trend of working from home amid social distancing. In a recent Realtors Confidence Index (RCI) survey, which gathers information from Realtors based on their transactions, 60% of agents reported they had clients who were looking for work-from-home features. Prior to the pandemic, Cororaton says around 6% of people reported that they telecommuted. “That rose to about 35% in May,” she says. The latest statistics indicate that figure will settle to around 23%, then decline to around 18% as vaccines take effect later in the year. Even then, by 2022, the percentage of people working from home is expected to remain at twice as many as were before the pandemic—at 12%. But Kennedy also predicts that the trend will settle on a “hybrid” format that allows people to mix commuting with telecommuting. Statistics indicate they’re already counting on that option, with the recent RCI survey showing that 31% of agents report a higher share of clients who live in the city, but want to purchase homes in suburbs or rural areas.
“We are seeing a shift in housing demand preferences,” Dietz says. “We saw housing demand, measured by permits, growing fastest in lower density markets … People are looking for more space.” Some of that effect will roll back in 2021, he says, as vaccines are deployed, “but, around 30% to 40% of workers will not be going back into the office five days per week, so they will be able to live further out,” he says.
An Autonomous Balancing Act
That’s not to say that all of the news for housing is positive. For every factor driving home sales and construction there are detractors. That might sound like a bad thing, but experts suggest that those offsetting forces are what help to “throttle” home sales and construction, keeping the industry from overextending and forming a bubble.
“When the market does manage to get out ahead of its speed, these input limiting factors pull the industry back to that long term trend line,” says Dietz, who describes the forces as an “invisible hand,” helping to regulate the industry. But those factors are more volatile now, amid COVID-19, which could add some “choppiness” to the year ahead, he suggests. For instance, as construction for new homes is slowed by material shortages and a lack of buildable lots, sales will have to match in order to allow backlogs to play out. Under this push-pull scenario, demand could fluctuate for doors and windows, but ultimately Dietz expects around a 5% growth rate in single family starts for the year. “We’re expecting a positive year for home construction, but not a blockbuster year,” he says.
Every Sale Equals Remodeling
Even if new home construction was to slow long term, home sales from the past year will serve as a direct driver of remodeling activities in 2021, experts point out. That’s because three decades worth of data shows that much of remodeling activity occurs around the time of sale, Will says—both from sellers sprucing up and making repairs, and buyers who then change things to their liking. Add to that a diversion of spending from things such as dining out, retail and vacations, and more money is expected to flow into the renovations and remodeling market in 2021, she predicts. “It all kinds of adds up,” she says. “All of that, plus pandemic relief, leaves homeowners feeling like, ‘Well, if I’m not spending to do all of these other things … I have this chunk of change, so there’s no better investment, as I spend all of this time at home and will probably do so going forward.’”
Historically, annual averages for growth in remodeling fall at around 5%, Will says. Harvard’s Remodeling Futures Program study projects annual growth in renovation and repair spending of 4.1% by the first quarter of 2021, with gains softening to 1.7% by the third quarter. Even at those rates, however, “I like to point out that 4%, or even 3% or 2% are still growth,” she says. “We are still projecting that the market is expanding and that homeowners are spending more than they did the prior year.”
Another possible contributor for doors and windows includes a focus on exterior work, as anything that keeps crews from spending all of their time inside of customers’ homes helps as the pandemic lingers, Will says. As a result, “We think there is a slowdown in larger project spending,” she adds, most notably including such things as kitchens and baths. “Anything that includes bringing a crew into your home … On the flip side, we think that exterior work has really chugged along, and maybe even faster than what we would have seen otherwise.”
Ultimately, everyone agrees that—even with vaccines—there are no guarantees for how COVID-19 will play out in the months ahead. That said, even if 2021 looks a bit like its predecessor, there will be plenty of doors and windows to make throughout the year.
Gay Cororaton, director of housing and commercial research
National Association of Realtors
• Historically low interest rates continue to draw out buyers
• Focus shifts to less expensive markets as people work remotely
• Median forecasted growth rates for home sales of around 3.5%
Robert Dietz, chief economist
National Association of Home Builders
“We’re big believers in the long-run homebuilding trend … we feel that we’re getting back on that trend line that’s been in place in home building since roughly 2011.”
• Around a 5% growth rate in single family starts
• A “geographic effect” will continue to prompt sales
• Unemployment improves, possibly reaching 5% by 2022
Kim Kennedy, director of forecasting
Dodge Data and Analytics
“The desire for homeownership is winning out.”
• 2021 to see a rocky start, but remain strong for construction
• Work from home settles on a “hybrid” format, allowing people to stay out of the office more while sometimes commuting
Abbe Will, associate project director
Harvard Joint Center for Housing Studies’ Remodeling Futures program
“The focus on home we expect to continue for some time.”
• Desire to remodel lives on for the foreseeable future
• Existing home sales occurring in 2020 drive remodeling in 2021
• Any return to normalcy doesn’t happen until late in the year
Nick St. Denis, director of research
Key Media & Research
“Single family construction starts continue to increase, despite the negative impacts of COVID-19 on other parts of the economy.”
• Dealer sales of residential windows for new construction and replacement to increase by more than 6% and 3%, respectively
• Manufacturers of fenestration products to increase their capacity utilization for the fourth straight year (since KMR has tracked this metric)
As availability of materials and material costs dogged door and window companies and other construction-related industries throughout 2020, experts say the same issues are expected to remain in the year ahead.
In a recent survey of remodelers, 25% reported that the cost of materials increased over 2020. By the third quarter, 77% reported shortages for framing materials (lumber), while 25% said the shortages were “serious.” At the same time, prices skyrocketed—nearly doubling in price, according to the producer price index, over a five-month period, representing the largest increase since 1975, according to NAHB data.
Also by the third quarter of 2020, 65% of remodelers reported a shortage of doors and windows, 19% of whom labeled the shortage as “serious.”
A recent reduction in tariffs for softwood lumber imported from Canada could help to soften issues, after in the final weeks of 2020 the U.S. Department of Commerce slashed duties from 20% to 9%. The move follows a decades-long dispute in which U.S. lumber producers claim to be held at a disadvantage by Canadian producers, based on Canada’s policies for timber pricing.
Officials for the National Association of Home Builders (NAHB) praise the reduction, suggesting it’s “good news for American homebuilders and homebuyers,” while adding, “more needs to be done.”
In an alternate take, officials for the U.S. Lumber Coalition, an alliance of softwood lumber producers and timberland holders, suggest that—even with the recent reduction to tariffs—the decision by Commerce, “confirmed once again that Canadian softwood lumber is heavily subsidized and dumped into the U.S. market.” The coalition now points to the next preliminary determination for a second administrative review expected in late January 2021, vowing to push for trade laws to be enforced “to the fullest extent.”
Drew Vass is the editor of [DWM] magazine.
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