A Temporary Downshift: Until Affordability Improves, Home Types and Sizes Call for Fewer Windows
By Michael Collins
When you work in an industry that spans as many sectors of the U.S. economy as the building products segment does, at any given time there will be factors encouraging growth and others that are less supportive. Construction alone represents over $1 trillion in annual economic activity and is influenced by myriad economic forces. Over the past several years, inflation has driven up the cost of various goods and materials, as well as leaving energy prices significantly higher. Dialing in the increases in interest rates that were needed to cool down inflation, home affordability has become a major challenge.
One response by builders is to focus on homes that are smaller in size than was the case in the past. This is a trend that has been active for some time. In 2023, the percentage of homes under 1,800 square feet rose by four percentage points, versus the previous year, according to U.S. Census Bureau data. The under-1,400-square-foot count has not been this large since 2015, and the 1,400 to 1,799 square foot percentage has not been this large since 2011.
This focus on smaller homes means fewer fenestration products and, typically, those sold at a lower price point.
Adjusting Expectations
Another response to the challenging market has been in the mix of dwelling types being built. The National Association of Home Builders (NAHB) recently reported that the single-family built-for-rent (SFBFR) segment, while small, is increasing in prevalence in this market.
SFBFR starts rose 10% in Q2 2024, versus the same quarter the prior year. For the trailing four quarters ending in Q2, the rate of starts in this segment rose 20% versus the same one-year period in the prior year. Despite these growth rates, NAHB’s estimated 8% share of the housing market contributed by SFBFR units is relatively small. Focus on SFBFR grew in the years after the last recession and the segment is being buoyed by affordability issues in the current market as well.
Another segment experiencing a tailwind in the current market is townhouse construction. In Q2 2024, townhouses enjoyed a 17% share of all single-family housing starts in the nation, per NAHB. This represents the highest townhouse market share since data on that housing format began to be collected in 1985. Townhouse starts increased 8% in Q2 2024, versus the same quarter of the prior year.
Door and window manufacturers serve the townhouse segment, but such structures have the disadvantage of lacking two walls of fenestration for each middle unit and one missing wall for the unit at each end of a row.
With the election coming up, we’re in the natural period of election predictions, hopes and fears. As we always maintain, candidates from the two major parties have different policies, but neither side can afford to do anything that would discourage home construction. Various policies may help the industry more than others and different income tax approaches may reduce net earnings. It’s difficult to foresee a 2025, though, that delivers anything less than a strong pace of single- and multi-family construction.
Michael Collins is an investment banker and a partner in EquiNova Capital Partners. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com
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