Under a Manipulated Economy, Analysts Aim for Moving Targets

By Drew Vass

As door and window companies gauge their expectations each year, two of the biggest macro-level indicators they use are housing and the economy—both of which directly impact demand. With factors such as interest rates, consumer confidence, construction starts and material prices baked in, those indicators can be difficult to pin down, even in the most straight-forward of years. These days, with countless uncertainties lingering from COVID-19, analysts find themselves aiming at a moving target: an economy and housing market that sways like a kite, loosely guided by the Federal Reserve and tethered to home buyers who time their moves like a game of poker while monitoring interest rates. Under those circumstances, one of the “wildcards” for 2023 is human psychology, says Lisa Sturtevant, Ph.D., chief economist for Bright MLS, a multiple listings service provider for the real estate market that’s based in Baltimore. After a nearly yearlong debate over the possibility of a recession and a rise in interest rates, consumers and builders find themselves locked into indecision, Sturtevant and other experts suggest.

After the U.S. economy shut down amid COVID-19 and the Federal Reserve looked to stimulate housing with historically low interest rates, “It’s like you shut off an engine and then you were trying to fire it up again, quickly. It simply got too hot,” says Robert Dietz, chief economist for the National Association of Home Builders (NAHB). “Now [the Federal Reserve is] trying to throttle back to cool the engine off a little. I think that really is kind of the analogy for what we’re going through.”

As the nation’s economic engine cools, statistics for home sales indicate that more home buyers lie in wait, hoping for better mortgage rates— many of whom have likely been pushed out of the market due to issues of affordability. As a result, statistics for starts among new, single-family homes show that builders have slowed production, waiting for more buyers to return to the market.

Fortunately, Dietz and other experts expect this stalemate to end, as the Federal Reserve obtains measurable evidence for progress in its fight against inflation, which could lead to reduced economic tightening in the first quarter of 2023. At the same time, most of the experts interviewed for this article expect interest rates to remain at or around their current level for the remainder of the year. The exception to this expectation would occur if gross domestic product (GDP) and the jobs market were to worsen suddenly. In such a case, the Federal Reserve could throttle up
by easing rates at a faster pace.

With so many factors at work, a Vanguard outlook for 2023 labels the current economic and financial outlooks as the most rapidly evolving in history. In short, everyone’s aiming for a handful of moving targets.

The Economy

So far as the overall economy is concerned, experts agree that conditions deteriorated in 2022. They also agree that this was largely by design. The “Feds” (as some analysts refer to the Federal Reserve) raised interest rates six times in 2022—including four increases of 75 basis points each—reaching for the highest target rate since 2008. Meanwhile, mortgage rates climbed over the course of 2022 from just over 3% to more like 7%, before decreasing in the final weeks of the year.

According to the 2023 Dodge Construction Outlook, there’s “little hope” for lower mortgage rates to return in 2023 and most experts consulted for this article agree. Rates aren’t likely to fall until 2024—or later—they predict. But in a year of caveats, some say it’s possible there could be slight reductions mid-year, under certain conditions. With inflation responding as planned, most say that—barring any major changes in areas such as employment—we’ve likely seen the highest interest rates we’re going to witness in the current era. While it’s unlikely that mortgage rates will ever be in the 3% range again, at some point in the future they could be as low as 4.5%, says Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors (NAR). That possibility could keep some owners in their existing homes, as they lie in wait, others suggest. Meanwhile, the economy has dawned a poker face, under constant talks of a recession.

“I heard one economist say this is the most anticipated recession in history, because we talk so much about it,” says Selma Hepp, executive of research and insights, and interim lead for the Office of the Chief Economist at CoreLogics, producer of the Core Logic Case Schiller Price Index. “We’ve been talking about this since the start of 2022 … I wonder at times if we’re talking ourselves into a recession.”

But at least one other key expert suggests the economy is too concrete to be pushed into a recession by public notion. “The idea that we can talk ourselves into a recession, I think, is a little farfetched,” says Dietz. “I mean economies move because of changes in such things as incomes, pricing, interest rates and technology.”

On the contrary, Dietz and others at NAHB believe we’re already in a mild recession, which Dietz believes will worsen slightly in the months ahead.

“The first quarter and the second quarter of 2022 had clear GDP declines. That was two consecutive quarters, which is typically the rule of thumb for defining recessions,” Dietz says.

This time around, however, there are some grey areas clouding that definition, Dietz says, including an employment rate that he feels is a bit of a misnomer. “We have a million to two million people who moved to the sidelines and never came back,” he says. “That’s artificially keeping businesses in a position where they’re still seeking out labor, even though the amount of economic activity taking place has gone down.”

Out of nine experts [DWM] consulted, three predict a mild, short-lived recession in 2023, but all agree that for the next few months there are numerous “wild cards” that could come into play.

The analysts at Dodge Construction Network took a fairly neutral ground on the subject of a recession in their latest industry outlook. They predicted that economic growth will slow to 0.7% in 2023, bringing the economy “dangerously close,” but ultimately forecasting that the U.S. will “narrowly avoid recession.”

The good news is, even if a recession becomes an undeniable fact, most experts agree it should be both mild and short lived.

An economic and market outlook produced by Vanguard suggests that households, businesses and financial institutions are better equipped to weather those conditions than they were in the past.”


With interest rates on 30-year, fixed mortgages reaching 7.5% last year and now hovering above 6%, the buying frenzy that led to a historic real estate market in recent years is clearly over. According to the National Association of Realtors (NAR), by October 2022, the volume of existing home sales had dropped for nine consecutive months, marking the longest run of declines since 1999. Most of the experts [DWM] interviewed agree there will remain fewer home sales in 2023, compared to previous years, for both resales and new construction, as home buyers lie in wait for lower interest rates on mortgages. For this reason, Dietz says NAHB is predicting as much as a 10-15% further decline in home buying activity. In a more dire take, the latest Fitch U.S. Real Estate Homebuyers Outlook warns of a heightened risk for a severe housing downturn, citing affordability issues, a softening economic environment and low consumer confidence. On the contrary, some analysts suggest the housing market could improve as early as mid-year, especially if the Federal Reserve is willing to lower rates. Lawrence Yun, chief economist for NAR, is among those predicting that housing will further decline for only the first two months of 2023 before starting its rebound.

With or without a further downturn, there’s much debate over whether home prices will decline or remain steady in the year ahead, which could influence both home sales and remodeling activities.

Evangelou says NAR expects about 2.8 million homes to sell in 2023, overall, compared to 5.1 million in 2022 and 6.1 million in 2021. It’s important to remember, however, that the markets in 2021 and 2022 were artificially stimulated by historically low interest rates, she points out, which led to a frenzy of competition and steep increases in home values. As a result, the median price of existing home sales has risen 38% since March 2020. Under those conditions, some buyers fear there could be a pricing crash, leaving them “under water.” But numerous factors indicate there won’t be any significant, long-term decline in prices. When the last crash occurred in 2008, the market was overstocked with new homes; in 2023, housing remains in a severe shortage, experts point out. Combine that with more stringent lending guidelines, and it’s unlikely that U.S. homebuyers will find themselves sitting on homes that are worth significantly less than
what they paid for them, experts say.

That’s not to say that home values won’t decrease— some experts say they will. At worse, Hepp expects prices will level in 2023, but Morgan Stanley expects U.S. home prices, as measured by the Case-Shiller Index, will fall by 4%. Wall Street bank expects prices to fall around 10% between June 2022 and 2024. So far as new homes are concerned, a Fitch U.S. Real Estate Homebuyers Outlook published in early December 2022 says prices are expected to decline by 8-10%.

At the same time, every expert is quick to suggest that any of those predictions could change, should the Federal Reserve raise or lower interest rates. Evangelou says mortgage rates play a significant role in affordability, but they don’t have to rise or drop by much to post a major impact.

“With even a 6% mortgage rate, housing becomes more affordable for many more home buyers,” she says. “The typical family currently cannot afford to buy a median-priced home with a 6.3% mortgage rate or higher, but at 6% housing becomes affordable again.”

In her opinion, the 6% mark could arrive as early as this year. If it does, the housing market could rebound sooner than expected.

“The entire industry needs to be prepared once we get through this Federal-Reserve-induced downturn,” Dietz says.


In the meantime, builder confidence has seen its first real decline since 2011, says Danushka Nanayakkara Skillington, NAHB’s associate vice president of forecasting and analysis, and it has been further eroded by a glut of cancelled contracts. Builder confidence in the market for newly-built single-family homes posted its eleventh straight monthly decline in November 2022,
according to the NAHB/Wells Fargo Housing Market Index (HMI), registering its lowest reading since June 2012 (with the exception of a brief setback at the onset of the COVID-19 pandemic). With this in mind, experts agree that 2023 will mark a challenging year for residential construction: some predict a further decline in starts of anywhere from 11% to 25%.

Cost of materials also weigh on builder confidence. While lumber prices have improved over the past year, costs for other materials have risen, the net result of which led to a 14% increase in the aggregate cost for construction, Skillington says. Meanwhile, according to Dodge’s 2023 outlook, the trend for higher material prices will continue, along with rising lot prices,  Skillington says, which have increased by around 25%. Under these conditions, she is among those predicting single family starts will decline by as much as 25% in 2023. Evangelou offers a more conservative prediction at a decrease of 11%. On a note of optimism, residential construction could remain unchanged, suggests Dodge’s latest construction forecast. The market for single-family homes is in decline, but will flatten to $274 billion in 2023, or 891,000 units, the report predicts. On another positive note, Fitch reports that builders show a high level of liquidity and available
credit, which should help to prevent a major slowdown, the firm suggests.


While it’s unlikely that door and window companies can fill the gap left behind by new construction solely through replacement products, numerous experts see the remodeling market holding strong. They back that prediction by pointing to an aging housing stock and significant changes following COVID-19 in how people utilize their homes, which has stimulated additions and alterations. Add to that a glut of would-be buyers who are opting to stick with their current homes (and mortgage rates), and cash spending is expected to increase for home improvements in the year ahead.

Like most things in 2023, there’s a lack of consensus over how strong the remodeling market will be or when it will arrive—including a prediction by the Joint Center for Housing Studies at Harvard University suggesting that homeowner spending for improvements and repairs will soften during the first half of the year. According to the Leading Indicator of Remodeling Activity (LIRA) produced by Harvard’s Remodeling Futures Program, year-over-year gains in remodeling expenditures to owner-occupied homes will decelerate from 17.4% in 2022 to 10.1% by the second quarter of 2023. Should that prediction hold true, by this time next year, door and window companies could find themselves in a pickle, as every expert interviewed for this article agrees that new home construction should resume at a more normal pace in 2024, rejuvenating demand for doors and windows.

“Building material manufacturers and suppliers need to get ready for 2024,” Dietz suggests. “By the time we get to 2025, we’re likely to be in a position where the market’s growing back to about 1.1 million single family homes per year.”

With a structural housing deficit that he estimates at about 1.5 million homes, the industry has a “good runway of growth” between 2025 and 2030, he predicts.

Drew Vass is executive editor and associate publisher for [DWM] magazine.

A Mostly Positive Outlook: The Manufacturer and Dealer Perspective

By Nick St. Denis

The residential construction sector has been on a tear over the past several years, plowing through a pandemic-induced economic setback and its immediate aftermath—and the door and window industry has been rewarded. Spending in both new construction and remodeling saw year-over-year double-digit percentage increases as recently as 2022. While the latter residential category appears to be maintaining its momentum into 2023, the former is hitting a peak.

According to preliminary results from [DWM] and Key Media & Research’s [KMR] annual industry outlook research, the fenestration industry is entering this year not with pessimism, but certainly with some level of caution. As we shifted gears into the new year, KMR surveyed door and window dealers and manufacturers to get their perspectives on the near-term future.

Current Business Envrionment

Dealers and manufacturers have mixed feelings about the current state of the economy and how it relates to the door and window industry. Less than half (46%) of respondents view the current business environment as favorable. Roughly a quarter (23%) are neutral on the topic, and close to a one-third (31%) view it as unfavorable.

Industry members cite interest rates, labor shortages, inflation and the potential for a recession as key areas of concern. Issues stemming from the supply chain disruption of the past several years have been equally concerning, though manufacturers assert that the supply chain continues to stabilize.

Sales Expectations

A majority (58%) of door and window dealers and manufacturers expect increases in sales in 2023 compared to 2022. While growth in new construction may be moderating in many areas, the retrofit market remains on the uptick. The multifamily market is also holding strong.

While 2023 expectations appear optimistic, they are not as positive as what dealers and manufacturers saw year-over-year in 2022. Last year, 88% of respondents had an increase in sales compared to 2021, with most seeing an uptick of 10% or more. Last year, only 4% recorded a decrease in sales, while
that percentage is up to 19% for 2023 expectations.

Several mid-to-large-sized manufacturers noted that despite an expected decrease in orders for the coming year, they have substantial backlogs as 2023 kicks off. Improved pricing has also allowed manufacturers and dealers to offset increased material costs and a slow-down in volume of demand, and certain markets, such as high-end residential, have longer-term potential.

[KMR] is wrapping up its industry outlook research, and the 2023 Door and Window Industry Outlook report will be available for purchase in February at www.keymediaresearch.com/research. Stay tuned for that announcement.

Going Against the Flow: Custom Homes

So far, one exception to a slowdown in construction includes the custom homes market, which showed promise heading into 2023. According to NAHB, Census Data from a Quarterly Starts and Completions by Purpose and Design survey shows custom home building moved in the opposite direction of other sectors—expanding in the third quarter of 2022, including 59,000 starts. That uptick marks a 5% year-over-year increase compared to the third quarter of 2021. Over the last four quarters, custom housing starts totaled 207,000 units, marking a 9% gain from the prior four-quarter total.

To view the laid-in version of this article in our digital edition, CLICK HERE.

DWM Magazine

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