Soft Landing

The kitchen and bath industry – booming, like the nation’s housing market, for the past several years – may be headed for a modest softening in 2006. However, no one could tell it from the comments of dealers and designers, who are generally bullish about their prospects for continued growth in the new year.

But while kitchen and bath professionals remain upbeat about both 2006 market conditions and their business strategies (see related story, Page 58, and Market Pulse, Page 12), housing industry analysts are pointing to an inevitable slowdown from what has been a torrid and unsustainable pace in recent years.

In other words, the housing market should be down this year from its record pace, but still be strong from a historical perspective, analysts say. And, the kitchen and bath market is likely to mirror that scenario.

Rising interest rates and skyrocketing housing prices are the prime culprits behind the expected “soft landing” for housing starts and home sales (see graphs above and on following page). Counterbalancing those downward forces, however, is a series of positive demographic and lifestyle factors, including increased home-buying activity among “echo boomers,” immigrant and minority households, a trend toward larger homes, and a spate of natural disasters expected to drive rebuilding efforts for several years to come. Also lending impetus to continued strength for housing is a relatively strong economy, an increase in jobs, growth in the residential remodeling market and a trend toward larger homes featuring higher-end amenities.

“Housing starts are expected to fall to 1.9 million units this year from an estimated 2.1 million last year,” notes Dick Titus, executive v.p. for the Kitchen Cabinet Manufacturers Association (KCMA). “This would be comparable to starts in 2004, which was a good year for cabinet manufacturers.”

Titus also observes that the remodeling market is expected to remain strong, “with a manageable increase in interest rates in 2006, anticipated investment in hurricane damage restoration and the need to maintain an aged housing stock.”

Of course, forecasters have predicted only moderate growth for several years running, only to find the housing market far outperformed everyone’s expectations. However, unlike previous years, there are now solid indicators to suggest 2006 will witness a slowdown from the previous years’ explosive growth.

According to Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University, “The difference between now and the last five years is, a lot of what was guiding the [forecasters’] scenarios was the sentiment, ‘Well, this just can’t sustain this level; it’s stronger than we thought it was and therefore it must be time for a slowdown.’

“That sentiment is still there, but it’s coupled with the fact that there are some real market indicators going on, too,” Baker comments. “The inventory of new homes and existing homes is beginning to run up at levels beyond what they have been in the past. We’re seeing housing affordability concerns begin to kick in as mortgage rates edge up and house prices continue to rocket up. And, the combination of those two things have made homes less affordable than they were in the past.”

Baker sees real evidence of this in that mortgage applications have slowed from their previous pace. “I think we are going to see a bit of softness this year, and lower consumer spending,” he states. “Certainly the consumer confidence numbers are weaker, and if we see a slowdown on the consumer side, I think that’s got to kick into housing eventually.”

Demographic Drivers
Yet several strong factors continue to drive optimism for those in the kitchen and bath industry. In housing sales, starter homes remain a major driver – with immigrant and minority households an increasingly significant part of the market.