Undeniable Optimism

To interpret the results of Residential Design & Build magazine’s 2010 Market Trends report is to understand that 2010 will be better — not worse — than 2009. More than 75 percent of the 624 designers and builders of custom homes who completed our survey expect their revenue to increase or stay flat in 2010, and 70 percent say the 2010 housing market will be the same or better than it was in 2009. In addition, 93 percent say they’ll maintain their staff level or hire more people, while only 7 percent anticipate staff layoffs.

Supporting the positive outlook for the 2010 housing market is Kermit Baker, chief economist for the American Institute of Architects, who says the rest of 2010 should show improvement compared to 2009. “For a lot of these firms it’s hard to project out more than a few months, but in general the numbers are showing that things are looking better in 2010. I have a hunch that at the end of the year we’ll see more positive numbers than today’s numbers indicate,” he says.

Inventory Drops

“The market is improving slowly, and I actually think demand is strong out there. But we still have a huge inventory overhang compounded by an increase in foreclosures. It’ll take time to work off that inventory and generate more construction activity,” Baker adds.

Good news from our survey is half of all respondents indicate they observed a reduction of inventory as a result of the first-time home-buyer tax credit, while 85 percent tell us their own inventory levels either decreased or remained flat. Government statistics show housing starts have remained at a relatively constant level, which as Baker points out can be misinterpreted.

“The numbers of starts and sales look worse than the market really is,” he says. “When you look at the sales of existing homes the numbers are strong. Again, we’re working off that inventory. The housing market seems strong at the bottom, which is good because this will be a bottom-led recovery. Entry-level buyer activity looks healthy fueled by tax credits and low interest rates, and prices certainly are attractive. First-time buyers who take advantage of the favorable conditions are sparking activity in the trade-up market. Numbers-wise, we have a good head of steam behind us.”

David Crowe, chief economist for the National Association of Home Builders, thinks the 75 percent of survey respondents who believe revenue will be flat or will increase are a bit optimistic, but agrees with AIA’s Baker that 2010 will be a modest growth year for housing in general. Crowe also is encouraged by the positive results of the first-time home-buyer tax credit. “We’re seeing a slightly larger impact from it than your survey results, but it’s clear the tax credit will make a difference,” Crowe says.

Commenting on the 18 percent of respondents who say they anticipate an inventory shortfall when the housing recovery kicks in, Crowe is “concerned that only 18 percent think this might happen. I think the chances of an inventory shortfall are greater than that.”

Baker also urges caution when discussing inventory levels. “There are some looming issues out there. We’ve had a soft market for so many years during which time manufacturers have cut back production and dealers have shuttered operations. What if we get a healthy recovery here? The consensus is it will be a slow, drawn-out recovery because of financing difficulties and lingering unemployment problems. But the unknown remains what will happen to an industry that has been weak for so long that it may not have the capacity out there to deal with it,” Baker asks.

When asked if they are concerned about the supply of building materials when the housing market recovers, 77 percent of respondents said no. The NAHB’s Crowe agrees that material availability will not be as much of a challenge as the price of those materials. “I think they’ll be able to get it, but prices will rise as building returns. Capacity will come back online when it’s clear that activity levels are sustainable and manufacturers can make enough money to ramp up production.”