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Volume 11, Issue 9 - November/December 2010

Trend Tracker

2011 Forecast: Looking Up
by Michael Collins

It’s that time of year again, when we look at the year behind us and do our best to predict the conditions that will prevail in the door and window industry in the year ahead. Industry participants that survived the challenging markets of the past several years can finally look forward to modest growth in the next two years. Reed Construction Data is predicting a 10.1 percent increase in residential construction spending in 2011 and a 21.2 percent increase in 2012.

The Year in Review
For most companies, 2010 started off full of promise. For the year-to-date period through May 2010, most door and window manufacturers were up 20- to 30 percent versus the prior year. By August, though, most companies were happy to be flat or up slightly. Part of the reason for that dropoff was the expiration of the first time homebuyer tax credit. We have heard of one Midwestern builder for example, who did not show a single home for 47 days following the expiration of the tax credit. That example was likely repeated throughout the nation. Reasons for the decline among remodeling focused companies likely include the sluggish economy, slower than expected job growth and the fact that the $1,500 tax credit probably pulled a portion of 2010 sales into 2009 results.

There are a number of factors that continue to constrain the recovery of the market, including the slow rate of spending of stimulus funds. In some cases, new programs must be created in order to execute the stimulus spending. In other areas, such as weatherization agencies, program executives who had previously struggled with meager budgets suddenly found themselves flush with cash. This required a build-out of infrastructure in order to access their designated stimulus funding.

mcollins@jordanknauff.com Among other restraints is the fact that banks are requiring borrowers to make higher equity contributions and have better credit scores. Ironically, this is exactly the sort of fiscal conservatism that would have dampened the severity of the housing bubble.

Reasons for Optimism
Despite all of these challenges, the next two years will likely be much better than the last two have been. The economy previously showed signs of a dangerous double-dip recession, where a full-blown recession is followed by a brief improvement and then another recession. Recent improvements in other parts of the economy indicate that this is not the case. When one is focused solely on a challenged part of the economy, it is sometimes difficult to perceive that conditions are improving elsewhere. On the commercial construction side, the Architectural Billings Index nosed into positive territory in September, registering its first indication of even tepid growth since January 2008.

"Despite all of these challenges, the next two years will likely be much
better than the last two have been."

Residential remodeling manufacturers will likely receive an added bonus in the early 2011 tax season. Hundreds of thousands of individuals will receive their $8,000 first time homebuyer tax credits and many will invest that money, along with the rest of their tax return, toward home improvements. It would behoove manufacturers and dealers to ready their campaigns addressing that trend now.

Another supporting factor on the residential side comes from the fact that homes are selling for less than their replacement values, a factor which cannot persist indefinitely. The ability to buy an existing home more cheaply than one can build a new one will help clear up excess inventories, allowing for a return to building new homes. The current consensus for new single family construction in 2011 is 600,000 to 700,000 units, with 800,000 to 900,000 predicted for 2012. Thus, companies that have survived the downturn and the housing crisis can look forward to moderately better markets in the next two years. Since not all companies were fortunate enough to make it through the storm, the companies that did should increase their market share in the next few years.

Michael Collins is vice president of the building products group at Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. His opinions are solely his own and not necessarily those of this magazine.