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How to Prepare for 2023's Potential Slowdown? Imagine You're Speeding Down a Road and ...

... a warning sign alerts you to trouble ahead. What do you normally do?

  • Take your foot off the accelerator, but don't hit the brakes.

  • Check the adjacent lanes and cars ahead, as well as traffic news on the radio.

  • Begin to calculate the odds that the problem ahead will be resolved by the time you reach where it happened.

  • And simultaneously, look for a bail-out exit.

In lots of ways, this scenario also describes the plan you should employ now to get ready for a potential slowdown in 2023. Lots of signs point to a change in the high-speed business pace you've been experiencing these past two years, but there also are numerous indicators that you'll keep racing along for months to come. We don't know yet when the slowdown will truly hit dealers and how bad it'll be. It's even possible that, once this nation has worked through its backlog of home construction and remodeling projects, the recessionary factors that caused predictions of a slowdown will have largely evaporated and you'll keep rolling along.

Here's where we are on the LBM highway now: First, the 800,000 single-family homes currently under construction are as big a number as we've seen in 15 years. Second, remodeling and maintenance expenditures are forecast to be 16% higher this year than in 2022, according to Harvard's Joint Center for Housing Studies (JCHS). And third, remodelers have a big backlog of projects; 62% of kitchen and bath installers have between three and six months' worth of work booked today, according to a survey by John Burns Real Estate Consulting for the National Kitchen + Bath Association.

Now comes the troubling news: The dramatic rise in mortgage rates, piled atop the hefty price increases for new homes, has pretty much cleared out interest among home-buyers and even caused a bunch to cancel deposits for new houses. As the table (at right) from research by the Calculated Risk blog shows, markets nationwide experienced steep declines in sales of all types of homes in October compared with a year earlier. A survey of big builders by Zonda in September found 37% planned to reduce housing starts in 2023 significantly, while another 48% planned to cut starts counts slightly. Meanwhile, JCHS recently predicted that repair and remodel spending in the 12-month period ending next Sept. 30 will be only 6.5% better than the previous four quarters.

The talk among housing experts, builders, and economists is that buyers will return once they are sure mortgage rates won't rise even further. (After all, millennials' grandparents routinely paid double-digit mortgage rates on their first homes.) And if the latest, better-than-expected consumer and producer price indexes for October signify a trend, we could see the inflation dissipate and mortgage rates decline from near 7% today.

Given the contradictory data, it's perhaps no surprise that you can hear wide variations from the prognosticators on what to expect. For instance, Fannie Mae believes there'll be a 25% drop in single-family starts next year, while the National Association of Home Builders foresees a 7.6% drop and the Mortgage Bankers Association predicts only a 1.6% decline. Those three groups believe multifamily starts will fall between 7% and 28%, but Builders FirstSource expects spending to go up by low double-digits.

At the same time, BFS has trimmed its workforce by 2,600 and is in the process of eliminating 17 locations. And it, like a lot of dealers nationwide, reportedly has far less commodity lumber on the ground these days than several months ago.

So let's return to that highway scenario. Like that accident somewhere ahead, you need to check your surroundings now and start doing some calculations. Above all, you don't want to get stuck in a jam.

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