Figuring Out 2019

It’s Time to Peel Back the Onion

By Anthony Wright

As we turn the calendar page from 2018 to 2019, it’s no secret that some uncertainty grips the construction market and overall economy, leaving many fearing that a recession could be on the horizon. Meanwhile, price fluctuations for raw materials have hampered growth across the industry, as we find new ways to play the cards we’ve been dealt. What’s really in store for next year? I took time to compile some of the factors I see having the greatest impacts.

#1. Trade Wars

As I write this, the U.S. and China remain locked in an ongoing trade war. As a result, new tariffs have made an impact on domestic industries far and wide—including building and construction (particularly as it pertains to steel and aluminum prices). The new year will bring an increase of 10-25 percent on tariffs for imports from China, leaving many importers scrambling to get ahead of the issue.

Meanwhile, U.S. duties on Canadian-imported lumber led to, on average, up to $8,000 to $10,000 in additional framing costs per single-family home built in 2018, in a market that already suffers from affordability issues. Toward the end of the year, those prices fell back to earth, but some new home prices continue carrying the load.

#2. Increasing Labor Costs

With the unemployment rate currently at 3.7 percent, employment numbers in the U.S. have been positive throughout 2018. That’s largely good news, but there’s also a bit of a domino effect. As we in the fenestration industry know well, “full employment” leaves a growing gap where jobs remain unfilled, creating hurdles for growth and productivity. This also leads to marginal wage hikes, as businesses attempt to draw in good labor and reduce turnover. From there, we may see some increased inflation, leading to:

#3. Economic Slowdown

By persistently raising the Fed Funds rate this year, we’ve seen the Federal Reserve return the economy to a normative monetary policy. As a result, interest rates have risen and will most likely continue to do so in 2019. In short, the era of “free money” is decisively over, leading to an economic slowdown. As of November, the Federal Reserve was projected to raise rates one final time before the year’s end and several times again through-out 2019. But those projections could change if and when economic indicators trigger a warning.

Simultaneously, a rise in private mortgage rates has led to a slowdown in originations. With homeowners locked in at low mortgage rates and higher rates making some home purchases increasingly unaffordable, mobility in the housing market will crawl to a halt.

#4. Incongruent Demand

Walk through any major urban center in America these days and it’s likely you’ll run into a crop of newly constructed luxury homes and condos. As the economy recovered from the Great Recession, builders were able to make attractive margins on homes like these, but it seems that may have hit a ceiling, leaving plenty of inventory. Meanwhile, demand for entry-level housing continues to increase, with insufficient inventory to match. As a result, Millennials settle for renting.

#5. Reluctance to Move Up

With interest rates rising, home-owners who are locked into lower rates may be reluctant to pursue a new mortgage on upgraded homes. Meanwhile, higher rates will also discourage first-time homebuyers from advancing to ownership from renting. This lack of “mobility” within the housing market will actually have a positive effect for building and construction in 2019.

#6. Time to Renovate

In the U.S., approximately 1.2 million new homes were constructed in 2018, which is a big source of business for the fenestration industry. But what about the other 123 million existing homes? With more people staying put, there’s good reason to believe they’ll be looking into larger renovation projects in 2019.

Most homeowners make major expenditures when their homes reach 20 years of age or older. With the median age of the U.S. housing stock at 37 years, replacement and remodeling suppliers can expect demand to be robust. Next year won’t come without hurdles, but I believe door and window professionals can find success in keeping with the fundamentals. Good management of your bottom line will be essential, along with focusing on continuous improvement, while retaining the right people. Above all, stay focused on the things you do well. It may behoove you to outsource lower-value aspects of your businesses, making it easier to focus on key, value-adding propositions.

Anthony Wright is director of strategic marketing and analysis for Quanex Building Products.

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DWM Magazine

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