Caution most of this year, optimism for the rest of the decade: That's what data and history lead economists and others to predict for LBM these days. Here are seven fresh indicators you should include in your planning.
Having a Ball
The current environment for repair and remodeling interests is like "holding a beach ball underwater," says Todd Tomalak, who leads the building practice at Zonda. “A large volume of future remodels and moves are percolating beneath the surface, waiting to rebound when financial conditions ease slightly," he wrote recently. "The industry should be planning for elevated levels of remodels and moves, likely higher than we have seen in the past 15 years. It is possible the decade of 2020-30 may well be remembered as the ‘Golden Age of Remodeling,’ but with a cyclical bump in the middle. We are at the bump now.”
Election-Year Slump?
Marcus & Millichap looked at three economic measuring sticks from 1985 to 2023 and compared election vs. non-election years. Here's what it found:
Job Growth: 1.1mln in election years, 1.7mln in non-election years.
Stock Market Gains: 53 points in election years, 136 in non-election years.
GDP Growth: 2.4% in election years, 2.7% in non-election years.
Of course, other factors besides the vote can influence performance during an election year--witness how COVID affected life in 2020. But in general, Marcus & Millichap's research suggests that the old story about election-year slowdowns is true.
A 'Covid Comeback'
The team at John Burns Research and Consulting (JBREC) believes remodeling spending is going through a mild decline in the first half of this year, as there's no longer much COVID-induced house-fixing going on. But starting in the second half of this year, the firm predicts a return to growth. But this time, JBREC says, the surge will be led by discretionary remodels--the projects that people want to do, like a kitchen refresh.
Increasing Optimism Among Pros
Two surveys covering four types of pros both revealed rosy outlooks. Fifty-seven percent of home improvement pros and full-service remodelers told JBREC-Qualified Remodeler magazine pollsters that they expect higher revenues this year than in 2023, and 63% of design-build firms said the same. JBREC also took note that, in the fourth quarter, home improvement pros predicted aggregate growth of 7.5% for all 2024. When asked the same question in the third quarter, the growth prediction was just 2.3%.
Meanwhile, one-quarter of the roofing contractors responding to a recent survey for Roofing Contractor magazine predict their revenues will greatly increase this year from 2023. Another 53% predict they’ll record a slight increase.
Mortgage Rates and Home Choices
This week's report of a 3.1% rise in the Consumer Price Index in January from the year before has damped some hopes on Wall Street that the Federal Reserve will cut lending rates soon. The betting money now is on a start to Fed easing in the second half of this year. That's important, because 30-year mortgage rates nationally are just over 7%. A drop into 6% territory--which rate buydowns by big builders are making possible--has been shown to spur purchasing of new homes. But the sludgy market for existing homes probably won't get any faster until rates hit 5.5%. Even then, nearly four-fifths of existing mortgage holders have rates below 5%, so lots of those people are likely to stay where they are. That's a good omen for remodeling.
Good-Bad News for Poorer Americans
Pay attention to how wealthy your area is, housing economists say. Rich neighborhoods have people who can buy homes without needing mortgages and who can get home-equity loans for major projects once they finally decide (as is expected) to upgrade in place. Poorer neighborhoods have been harder hit by rising costs for food and shelter, and thus haven't had as much money to spend on their homes. It's one reason why both The Home Depot and Lowe's are seeing year-over-year sales declines. Ironically, poorer households also have seen some of the biggest percentage gains in income these past two years. But that extra money will go to daily needs first, not to home improvement.
Attitudes Matter. Actions Matter More
Economists used to pay close attention to consumer sentiment surveys because there historically had been a link between how people felt about the economy and how much they spent. But post-COVID, that gap became disturbingly wide: People kept saying they felt bad about the economy, but their actual spending rose beyond what higher prices suggested would happen.
Since December, the University of Michigan's survey of consumer. sentiment has perked up; one reason why may be that increases in hourly earnings started exceeding rises in the Consumer Price Index starting last spring. The National Retail Federation estimates 2023 holiday spending was up nearly 4% from the year before, one-third higher than the 3% inflation rate during that period.
But this doesn't mean all consumers are sunny today. A Pew Research Center survey in January found only 13% of Republicans and those leaning Republican rated economic conditions as good or excellent, while 44% of Democrats and those leaning Democrat gave a good or excellent score.
Luckily for LBM, people in both parties need a place to live. And in a nation that's massively underbuilt and with a median housing stock age of 40 years--the prime age in which repairs and upgrades are needed--prospects for construction supply look good for the rest of this decade. We just have to wait for that beach ball to shoot up first.
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