The Sky Is Far From Falling in ’08

There’s a story making the rounds which suggests, quite convincingly, that the nation’s housing market is on the brink of collapse and that, by implication, the kitchen and bath market may well follow.

Popular in the mainstream press, the story has shaped widespread perceptions about the market that ring hollow in the face of both history and the facts . . . to say nothing about logic.

And it’s something that should be kept in mind as 2008 gets underway in earnest this month.

Clearly, the housing market has witnessed a steep reversal of its recent boom (see Forecast 2008). New construction and home sales are down significantly. Cash-out refinancing activity has declined. The inventory of unsold homes has risen. Consumer spending and home improvement product sales have slowed.

But this is where the hysteria begins – along with the obvious disconnect between media coverage and the facts.

Just look back, for example, at recent history.

In 2002, existing-home sales – a key factor in residential remodeling – peaked at a record of more than 5.5 million units, and three-quarters of the nation’s metro areas showed price gains over the prior year. Home buyers were confident that the market was strong and healthy. Housing analysts concurred.

Well, guess what?

In 2007, existing-home sales should wind up to be about 5.5 million units, and two-thirds of the nation's metro areas showed price gains over the prior year.

That’s right – roughly the same scenario.

And yet public and industry perceptions about the housing market are radically different these days than they were five years ago.

Why?

Perhaps we’ve been spoiled by those past five years. Perhaps the recent extended boom in housing has warped our perceptions and expectations. Perhaps in the interests of context and balance, we should look at some important realties.
For example:

  • The national media has tended to report negative housing stories as if there is one nationwide real estate market, when, in fact, there is no such thing. All housing markets are local. Conditions vary greatly from one market to the next. However, because some formerly superhot markets have suffered dramatic reversals, many healthy markets, including the vast midsection of America, are being unfairly portrayed in all the negative headlines.
  • While the recent rise in foreclosures and delinquencies has dampened consumer confidence, those problems have been concentrated primarily in the subprime market. Contrary to perception, conventional mortgages are widely available at favorable interest rates for the bulk of home buyers. The pricing and availability of jumbo mortgages has improved, and subprime mortgages are being replaced by an abundance of safer mortgage products. Over time, the current credit crunch will filter through the system, investors will return to the market and the lending issues impacting the market will dissipate.
  • Much is made about stagnant or declining home prices, but, in fact, the median existing-home price in 2007 will have fallen by less than 2% from an all-time high in 2006. The vast majority of metro areas posted rising or stable prices for existing single-family homes compared to a year earlier. Despite the dip in the national median price over the past year, the median increase in value for home sellers who bought six years ago, the national average, is a whopping 38.8%, or more than $60,000. That’s still plenty of equity to draw on, if homeowners wish.
  • The demographics of home buying and remodeling continue to be favorable. Homeownership rates are near record highs, while the nation’s housing stock now averages a record 30-plus years old. Baby-boom households in their peak earning and spending years continue to drive a market in which youngerbuyers, immigrants and second-home buyers are also plentiful.
  • The kitchen and bath market continues to rest on a solid, secure, multi-tiered foundation. Pent-up demand for home-related purchases is high. The residential remodeling industry, estimated at a whopping $290 billion in annual expenditures, remains poised for long-term growth, much of it in the high-end, discretionary niche of which kitchens and baths are a part. American lifestyles, with their continued emphasis on family and home, almost guarantee healthy levels of spending. And kitchens and baths, as much as ever, remain prime targets for attention and investment.

The kitchen and bath market is also a sector that industry insiders continue to remain fairly bullish about. A recent KBDN survey of dealers and designers revealed that more than half of those polled plan to add displays to their existing showrooms in the next 12 months. More than one-third plan showroom expansions. Nearly two-thirds report they’re planning to add or change out product lines. And manufacturers continue to invest in the market – building new factories, expanding capacity, opening new markets, rolling out new product initiatives and executing similar bold, strategic moves.

Clearly, the current housing situation is nothing to be taken lightly. It has been difficult for many companies, particularly those most closely connected with new residential construction. And it will continue to be painful for as long as it lasts.

But what’s happening represents a healthy and inevitable cooling from the hot, record-breaking, unsustainable pace of recent years…part of a cyclical pattern that’s been a fact of life in the housing market for decades.

By no means should it be overly alarming. By no means should it be taken out of context or blown out of proportion. And, by no means does it spell, as some press reports suggest, an outright collapse for either housing or the kitchen and bath market.

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