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Episode 187 2023 Housing Market Predictions and How Manufacturers Should Manage

2023 Housing Market Predictions and How Manufacturers Should Manage

It’s time to talk numbers again: about the housing economy and building materials, and what the housing recession means for manufacturers. (Note: It’s not all bad news.)

Photo of Zach Williams
Photo of Beth PopNikolov
by Zach Williams and Beth PopNikolov
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The Smarter Building Materials Marketing podcast helps industry professionals find better ways to grow leads, sales and outperform the competition. It’s designed to give insight on how to create a results-driven digital marketing strategy for companies of any size.

We’re bringing John Burns on to the show again this week for a temperature check. With words like “recession” and “risk” on everyone’s mind, we wanted to explore what’s happening in the market with an expert who sees the opportunities ahead.

Predicting the Unpredictable in Housing

“Over the last 24 months, it felt like every day was a new economy,” says Zach Williams with Venveo. That kind of change and volatility can make running a business challenging, especially in the building materials industry during what the NAHB is calling a housing recession.

So what can we expect if we’re trying to build a business in such an economy? We wanted to talk to a real estate market expert and brought John Burns on once more to discuss where we are now and how we got here in the first place.

“[In] 2019, the market was starting to get frothy, and it was starting to slow down a little bit because of that,” says John. COVID hit and shook up the industry, and in the last year, we’ve seen record highs and lows in the housing market, along with serious inflation.

We’ve talked before about trends in the market and the impact of the Federal Reserve dropping mortgage interest rates this year. “They were using our industry to try to get things there and they created, frankly, too much home price appreciation,” explains John.

“What they have been doing to pull us out of that rabbit hole, where we had all the retail and service sector companies really struggling, was let's get housing going. And man, did they ever,” says John.

The interest rates went down, and the prices of homes soared for a while — until recently. “As we sit here today, towards the end of August, our home builder clients have dropped home prices 5% in the last three months, which is probably the fastest correction in my lifetime,” says John.

The price decline might seem daunting, but John argues that builders are still better off than we were in the 2008 recession. “Yeah, you're making tough statements on your earnings calls about things not being so great year-over-year, but you're still kicking butt,” he says.

The story is a little different in building materials, where prices are up. “Half of them have really high margins. The other half have had their cost go up faster than they've been able to raise price. So I know it's been a struggle for them,” says John.

Building Materials and Numbers

Big builders like D.R. Horton have reported lower housing starts, along with other large building firms. “The government reported that U.S. homebuilding sank to its lowest level in over a year, with housing starts plunging 9.6% as higher construction costs continue to weigh on builders,” writes Danial Clark for Investopedia.

That doesn’t mean they’re not building anymore, however. “The way I would summarize it was, we were selling three homes per community, per month, and we're going to go to two, which is more of a normal number. At the same time, we're going to open up more communities, because we already bought the land and that's what we do,” explains John.

Privately owned building firms might see bigger changes, but John is optimistic. “I don't see them letting go of people. I do see them offering their companies for sale,” says John, which means we’ll see more consolidation deals among builders.

This will impact homebuyers, as well — their numbers aren’t high right now, either. “Not all of those people can afford to buy a house right now. In fact, frankly, some of them can't even afford their rent increase,” explains John.

As Fed Chairman Jerome Powell put it, the housing market needs “a bit of a reset.”

But what does a reset look like? And what does that mean for building materials?

It’s Time to Pivot

Adapting to market needs will be key for building materials manufacturers, and John and his team speak with companies about the need to stay agile these days.

“I have those conversations daily. We're telling them to pivot,” says John. “We do think we're in a long-term repair and remodeling boom, but a recessionary period could be a hiccup along the way. That's what we're telling them to focus on.”

These kinds of shifts, and a recession, will mean a few different things for the building materials market. We asked John what kind of trends we might see when it comes to homeowner demand:

Smarter Spaces

Homeowners and tenants want buildings that will last, no matter how long they stay in the home. “This single-family rental trend, where they're building rental communities, is different types of materials that people want. They're more durable, and there's some surprising things that are going on. The stairways need to be wider because people are moving couches in and out more often,” John explains.

Location Trends

John also points out the demographic shifts relative to location, and how that will impact homebuilding and materials. “There are certain geographies that if you focus there and the materials they want there, and you're going to outperform other places. I live in one of those geographies that's not that way — California. Frankly, you can see it on the freeways here, that traffic is not like it used to be. People have left,” he says.

Business Exits

“I mean, if you pay attention to this stuff, you can kill it,” says John. “This is an opportunity. In fact, I'm glad distress is coming because there's going to be more sellers — or more opportunities.” From builders to building product dealers, we’ll be seeing sales.

Commercial Space Shifts

The impact of COVID has certainly left its mark on the housing market, but made waves in the commercial building industry, as well. “We're not going back to full office employment…office buildings are not trading at a discount,” says John. Retail spaces were already in decline because of the rise of online shopping. “That shift got supercharged for two years.”

And we’re looking at a recession, John says. “We're forecasting job losses next year as the most likely scenario. The bad stuff usually comes from Wall Street and some sort of crazy debt syndications. We saw a lot of that, not necessarily in housing, but I saw enough of it in housing to know that there was an appetite for high-yield debt.”

John points out that we saw some of these changes coming already. “It was perfectly predictable we were going to have a labor shortage. That is perfectly predictable going forward because the number of people are going to retire,” he explains. “And then eventually, those people are going to start passing away and provide more resale supply to the market than we've ever seen before.”

If we can count on those facts, manufacturers can count on the impact they’ll have on housing, Zach explains. “You zoom out in the next 25 years, as Baby Boomers move out of their homes. I mean, they own, what? Over 50% of homes in America,” he says.

That means we’ll have more supply to the housing market. “Which will mean that we need less new home construction because of this other supply that's coming than we have in the past,” explains John. “I mean, that's not Armageddon — it just means we're not going back to 2 million units a year. Those averages are looking backward, not looking forwards.

Want Even More Insight?

It can be a challenge right now for product manufacturers to gauge how the housing market will look, even on a daily basis, but John is confident that companies can prepare for it. “The big pivot is to repair and remodel — away from new,” he says.

Want to stay on top of the market? You can sign up for John’s company newsletter for more insightful industry data and updates.

And be sure to subscribe to the podcast! We have some great episodes coming up, and a library full of exclusive interviews, tips and commentary on the building materials industry for you to explore.