A Soft Landing

A Soft Landing

By Daina Darzin

It’s a slowdown, they quickly explain, that will not be nearly as dramatic as downturns of the past, since so many underlying economic and demographic fundamentals remain solidly in place. Nevertheless, it will be a slowdown that will no doubt be noticeable, helping to define a market that should remain very strong in historic terms, just not as vibrant and fast-growing as the frenetic, and unsustainable, market of the recent past.

"Our current forecast is calling for a soft landing in 2001, with activity slowing just a little bit from 2000," says Walter Molony, of the National Association of Realtors (NAR). "The housing market will still be very strong in historic terms, but down from those record peaks of a couple of years ago."

"We’re looking at an economy that’s operating somewhat below trend – not approaching recession, but at a relatively slow growth rate," comments David Seiders, chief economist for the National Association of Home Builders. "Housing starts did decline between the first and third quarters [of 2000, and] we’re looking for the numbers to edge off a little bit more. But, I think the lion’s share of this housing downswing is behind us."

Adds Seiders: "There is nothing approaching recession on the horizon."

According to the NAHB, housing starts fell about 4.6% from 1999’s level, to 1.598 million units last year, and should decline another 4.6%, to about 1.524 million units, in 2001. However, a rebound, to 1.564 million units, is expected in 2002, the NAHB reports. Single-family starts – recently up around their peaks – will follow the same pattern, the association predicts. Currently at a seasonally adjusted annualized rate of 1.261 million units, single-family starts will bottom out in the fall of 2001, and wind up the year at about 1.212 units, rising to 1.24 million units in 2002 (see Graph 1).

Existing-home sales are not expected to slip below a healthy 4.7-million-unit-per-year pace in 2001 or 2002, according to the NAR, which projects existing-home sales of about five million units in 2000, down 4.9% from 1999, but similar to 1998 levels. The association forecasts a drop in existing-home sales in 2001, followed by a stabilization and rebound in 2002 (see Graph 3).

The setbacks being projected for 2001, expected by analysts for some time, are generally not being viewed with any sense of alarm – largely because so many underlying fundamentals support continued industry growth. For one thing, the U.S. homeownership rate is at an all-time high of about 67%, while household incomes grow, consumer confidence remains strong and unemployment remains low. In addition, all indications are that mortgage rates have peaked, and residential remodeling expenditures – particularly among professionals – continue to increase.

All of these factors have led kitchen dealers, designers and manufacturers, by and large, to remain bullish over their 2001 prospects (see related story, Page 52).

"The U.S. economy is setting a new record with each passing month for the longest string of consecutive months of positive economic growth, and the end of ‘good times’ is not yet on our radar screen," says Lawrence Yun, forecaster for the National Association of Realtors.

"There’s been some talk of a huge decline, [with all] the tech stocks going down the tubes. But right now, the ‘R’ word, recession, is not in our vocabulary."

The KCMA, which has reported 54 consecutive months of growth in dollar volume among its members, says that overall cabinet demand actually fell slightly in 2000, to 81.7 million units. The trade association is projecting 2001 demand to be about the same, with declines in the new-construction sector being essentially offset by gains in remodeling.

"What we see is full employment and good income still fueling the remodeling market," explains Dick Titus, executive v.p. of the Kitchen Cabinet Manufacturer's Association, adding that the nation’s housing stock continues to age, and the owners of those homes have the disposable income to upgrade themselves.

"[The market] didn’t slow down as much as people feared; housing forecasters have been calling for a slowdown of the market for the last three years," notes Kermit Baker, director of the Remodeling Futures Program at the Joint Center of Housing Studies, Harvard University. "Once we get this deep in an economic expansion, housing is usually one of the first sectors to moderate – [but] it hasn’t. It’s continued to expand. Homes are bigger and better and more expensive."

Baker, nevertheless, admits that "for the first time in almost a decade, people are starting to talk about the possibility of a recession. I don’t think it’s terribly likely that we’ll see one, [but] I think it will force businesses and consumers to think a little differently. They’ve been really on a substantial spending surge recently, and I think that’s going to slow down. Some consumers will pull in a little bit, and businesses [may] cut back on their expansion plans."

However, while warning that problems like high oil prices, interest rates, the weakening economic expansion, a waffling stock market and political uncertainties can affect prosperity, economist Bill Toal says the U.S. construction industry "looks strong," and he expects it to remain that way for the foreseeable future.

Market factors
A number of factors can impact the economic forecast, including mortgage rates, interest rates, available housing stock, the performance of the stock market, the influx of foreign money into the U.S. economy and the outcome of the Presidential election.

Experts agree that mortgage and interest rates should remain stable, lending a flat affect to the economy. "I have forecasted that the interest rates will continue to creep up, but it will be erratic, in fits and starts and steps, not a gradual thing," believes Thomas Loy, chief economist for the construction industry consultant FMI Corp.

Molony, like many economists, projects a 30-year fixed mortgage to be right around 7.8% – just under the important psychological barrier of 8%. "We’re not looking for any great variation," he notes. "That should help bring some stability to the marketplace."

The amount of available housing stock is also a key part in the equation. "Existing housing has been stronger than new housing," notes the NAR’s Yun. "There’s [currently] a very low level of inventory of housing. Historically, there has been about six or seven months’ supply of housing for sale [at any given time]." Recently, that’s been cut to three or four months. Housing prices have gone up faster than the inflation rate," Yun observes. "I think this is actually a good sign for housing starts – they’re looking for profit incentives. [That brings] optimism."

Some economists are less optimistic about the stock market, given its recent volatility, particularly with tech stocks. The high-profile failures of some dot.com businesses are also contributing to some concerns.

"People are more nervous this year," Loy comments. "You read more about layoffs here and there, and it begins to dawn on people that it could [always] happen to them."

Still, "the amount of capital gains that people who have been in the stock market for a couple of years have under their belts is quite substantial," says Seiders, adding that the weakening of the stock market has more of a psych-ological effect, particularly in the entry-level market.

"Most people who invest in stocks are in it for the long term," adds Yun, with 401Ks and pension funds the bulk of their stock market involvement. "There are some people who will be affected, especially in the high end, but for most families, their decision concerning home purchases is not too much affected by the stock market."

Ironically, the market’s turbulence can also have a positive effect on the housing market, some analysts contend. Molony, for example, points out that it can lead people to choose less risky investments, such as real estate.

"The accumulation of wealth in both the stock market and home equity was a factor in last year’s record [growth] in the vacation home market," he adds. "It’s part of portfolio diversification."

High end or low?
Opinions do vary considerably, however, regarding what sectors of the design/build marketplace will be most affected by the changes in the economy.

"Historically, [the lower market being most affected] has not been the case," counters Baker. "It’s the upper end of the market that gets hurt the most, with higher interest rates. A lot of that money has recently come from stock market run-ups, and if higher interest rates in fact slow the stock market, that will really bite first on the upper end of the market."

"The upper end of the market tends to be more adversely affected," agrees Molony. "When you’ve got a slowdown in the entry-level market, then people can’t sell their existing homes to trade up. Most of the new construction today is geared toward upscale repeat buyers. The typical new home is significantly larger than [existing housing stock]."

"The market cannot function in pieces," insists Seiders, pointing out that even high-end consumers need to sell their existing home before committing to a larger one. "The various components of the market always move in the same direction."

Opinions also differ as to how the economy will affect the remodeling market.

"I think that’s going to get a bit of a shot in the arm this year," believes Loy. "The people who find it not practical to buy another house may well put more into remodeling, making things nicer where they are."

"Historically, that has not been the case," counters Baker. "There is the notion that remodeling is the countercyclical market for housing; the evidence is that it is less cyclical. Housing numbers will bump up and down 15%-20%; remodeling numbers tend to be more moderate. But, [both markets] tend to be influenced by the same thing – if you’re paying higher interest rates and financing that upper-end home improvement and you’re nervous about the economic outlook, you’re going to probably hold off doing anything until things get a little more clear."

"We are bravely forecasting that the real value of remodeling activity will hold steady next year," says Seiders. Consumers do sometimes pick remodeling over buying a new house, he believes, and "also, it’s just a market that does not have as much short-term ups and downs." Seiders points out that most residential remodeling jobs aren’t financed by credit – and, as a result, are less affected by interest rate swings than home buyers.

Overall, however, "the remodeling market usually moves in the same direction as [the housing market]," Seiders observes. "A lot of remodeling is done within a fairly short period [after buying a home]. We have a lot of wealth gains in housing, capital gain accumulation, and house prices have been moving up quite well for the last couple of years, so homeowners have a lot of untapped housing equity at their disposal."

Who is buying?
In terms of buying power, baby boomers are still key because of sheer strength of numbers. "They’re at the height of their earning years," says Molony. "These are the people who are [currently] trading up to the larger, more expensive properties – and also trading down to smaller primary residences and buying vacation homes."

"The most rapidly growing age groups are 55-64 and 44-54," Seiders explains. "This is heavily an era of trade-up and edging into managed communities. We expect the trade-up market to be strong. The second home market has been very good. The starter home market is going to be okay, but there is some weakness in the growth of the [younger] age groups [today]."

Twenty-something "dot.commers" are also making an impact in areas with burgeoning high-tech industries. "That’s part of the overall picture for sure," states Titus. "The tech sector is still strong and they’re still acquiring things. That’s their lifestyle. They’re looking for something different and that helps fuel more finishes, more accessories, more [high-tech] appliances. That’s a significant, strong part of our market."

Titus also notes that immigrants who are coming to the U.S. for high-tech jobs are also fueling this market. "They’ve taken productive jobs in the economy and bought into the American Dream," he explains. "They believe in houses and remodeling and doing things. That’s helped offset the lower birth rates in other areas."

"Right now, we are [currently] seeing first time home buyers [purchasing] at a later age," thinks Yun, noting that they are more inclined to buy homes in their mid- rather than early thirties.

Overall, the message seems to be not to panic, but don’t go crazy with expansion plans for your business, either.

"The Fed has been working very hard to slow the economy," says Baker. "It looks like those interest rate hikes are finally starting to catch hold, slowing down the economy. Our sense is that housing and remodeling are going to follow suit in 2001."

In other words, business will still be good – just a good deal quieter. KBDN

Kitchen and Bath Dealers Remain Bullish About 2001 Forecasts

The measured caution expressed by most kitchen/bath industry analysts is being reflected in the sentiments of some dealers and designers – but most remain enthusiastic and expansive about their business plans for 2001.

"Our year was fabulous in 2000," says Trish Mauro, CKD, CBD, of the Orange, CT-based Mauro & Co., whose business is split about evenly between remodeling and new construction, and reported 25% growth last year.

Mauro is looking to grow even more in 2001. "I just hired two people," she notes. "We’re training them, we’re moving our showroom," increasing space from 2,500 sq. ft. to 7,000. "That won’t be all showroom. We’re going to have our shop right there and we need to increase office space. Six years ago there were three of us, now there’s 13-14."

Others report similar results.

"Business is booming. We’ve had a terrific year," reports Chris Nicole Prince, of Simon’s Hardware and Bath, in New York City. "In 2000, we went on a very sophisticated computer system and also expanded our showroom. We bought the building next to us, cut through and had construction for months." Despite that disruption in their business, Prince says Simon’s is meeting its projections.

Simon’s future plans, Prince notes, include more warehouse space in the company’s Long Island City facility. Simon’s also plans to fine-tune its customer service program, to market to consumers and to expand its existing business to local contractors, cabinet and furniture makers.

"We’re going to open up an outlet center in Queens," which will include closeouts and lower-end items, Prince notes.

Bud Essig, of the Columbus, OH-based Carr Supply, has also gotten mileage out of his company’s award-winning showroom redesign. He notes that his business in the kitchen and bath arena was spectacular, with upscale faucets and whirlpools particularly strong sellers, frequently for upgrading new construction projects.

Essig forecasts a modest 5-7% increase in sales for 2001, "if interest rates stay at a reasonable level." His marketing plans include conducting cooking demonstrations for designers as a way of promoting appliances, and getting more mileage out of his new Web site. "We haven’t really promoted it yet – we’ve gotten some calls but not many," he notes. "We’re not ready for it yet. We’re mainly wholesale oriented. We mainly sell through dealers, designers, builders and plumbing contractors. We’re not ready to handle a lot of retail."

Gary White, president of Kitchen & Bath Design in Newport Beach, CA, says his design firm is currently "rocking and rolling." He, too, plans to increase his staff and enlarge his office space. "We’re looking to exceed our 2000 numbers by 50%," he says, adding that he’d been turning down business because of health and staff problems in 2000. "We’re converting one of our kitchen displays to a home office display and it’ll become an active office as well as a display," White says, adding that he’s looking to market more aggressively to his referral base, as well conduct more "guerilla-based marketing" – for example, calling on architects and designers. "We’re going to be more proactive," he says.

In terms of demographics, White notes an increase in newly rich, twentysomething dot.commer clients. "We see people coming in [wearing] shorts and a backwards baseball cap who bought a house that’s four times what I could afford," says White. "They don’t have any idea of what things cost and they don’t care. This buyer is after something different and better, and personal attention." Ironically, White notes that this segment of his customer base often requests very traditional looks, while his older, baby boomer clients want something that’s easier to take care of, such as Shaker or Craftsman-based retro designs.

"The young [consumers] are out there buying these fabulous homes, they have a lot of money behind them and no worries about anything," confirms Mauro.

"It’s a younger customer and an older customer," believes Prince, who explains that previously, older people were opting to move to a smaller space, whereas now, they’re remodeling their "empty-nest" home to make it their dream house.

Dealers and designers surveyed by K&BDN also differ on whether they consider the overall economy and housing market a factor in their success.

"I don’t care about housing starts," reports White, who says that growth is primarily contingent on a company’s target market. "When new construction is up, you need to step up your relationship with the architectural community. When remodeling is high, you have to step up your more basic types of advertising."

The Presidential election and overall economic forecast also register differently with dealers surveyed by K&BDN.

Prince says Simon’s decision to buy the building next door rather than expand into retail outlets throughout Manhattan was based on the company’s cautious approach to the economy. "I don’t want to assume tremendous debt," she explains. "We as a company made a very conscious decision that we weren’t going to wait until there are [negative] economic indicators. We saw competitors putting up multi locations and I didn’t want to go down that road. I’ve tried to make us as recession-proof as I could."

"I don’t spend a lot of time worrying about [the election crisis], says Mauro. "If you keep working hard and focus, it doesn’t affect us in any way, shape or form. Our business continues to grow."

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