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MIDYEAR HOUSING OUTLOOK

Metrostudy’s Mark Boud sees tailwinds supporting a constructive view for the next 2-plus years. Then, a couple of red flags to prepare for.

Housing’s recovery–supported by demographics, jobs and wage growth, moderately low interest rates, still affordable prices, and pent-up demand–has more of the same good-but-not-great news and numbers ahead for the next 18 to 24 months.

Then, look for some red flags, especially if the the broader economy checks up, slowing job growth momentum.

BUILDER sibling Metrostudy chief economist Mark Boud’s top line analysis of housing’s outlook–the 2nd Quarter 2017 National Residential Economic Report–can be found here with a click.

Boud’s take on housing’s Goldilocks recovery directionally matches up with most of the business community’s smart observers, a constructive view of steady, modest improvement, fueled by economic fundamentals on the demand side, and cadenced by lot, labor, and lending constraint on the supply side.

“We like to call it the CFO’s Recovery,” one astute observer in the arena tells us. “It’s not as sharp, fast, flashy, or dramatic as a CEO would want the recovery cycle to be, but it’s manageable, predictable, and it allows prudent planning for the future.”

Mark Boud
Mark Boud

Boud’s looking at some upward pressure on mortgage rates into the 2020 timeframe, with a peak at around 6.1% before retracing back a bit, and during most of that time, the picture looks quite a lot like it does and like it has, with single- and multfamily housing starts stepping up from 1.26 million this year, to 1.355 in 2018, to 1.44 in 2019, before a slight drift back in 2020.

New home sales for 2018, Boud says, will reach 710,000, but the forces in play dragging on new home sales’ share of total share aren’t likely to shift in any material way.

Here are some of the other highlights of Boud’s 10-minute debrief on all the key metrics you’d want to know:

  • The unemployment rate continues to fall and is currently at 4.4%.
  • Housing starts will continue to climb until 2019 when we expect it to plateau.
  • Housing shortages will become more intense, causing an accelerated and shorter sharper real estate cycle with a peak in 2018/19.
  • An extended period of low mortgage rates has allowed home prices (and land value) to rise higher and more rapidly than they should have.
  • A higher national Debt-to-GDP ratio will lead to higher interest payments which will eventually dilute US currency and slow the US Economy.

The real “secret sauce” of Boud’s intelligence comes when he speaks to his proprietary model of over- and under supply of housing in the nation, as well as over- and under valuation.


It’s these benchmarks that can and do flag counter-intuitive dynamics in the timeframe ahead, and allow for preparation.

As many builders and housing industry experts right now are predicting a continued “long tail” recovery despite the fact that this one is historically long, as are expecting a macroeconomics-driven pull-back in the about the 36- to 48-month horizon.

Some suggest that because the recovery has been so gradual and tepid that any downturn in the horizon would have to be similarly moderate.

Of course, humans are highly prone to error when it comes to the future.

“If you asked builders to make their projections for what’s going to happen and then ask them to say that if they’re wrong, which direction they’re wrong, almost all of them will tell you they’re probably not pessimistic enough about the risk that’s out ahead of them,” says one of our executive observers.


So, preparing for risk to amp up–especially when an under-built housing environment shifts to an over-built one, and when an under-valued market suddenly flips to over-valued–is in vogue among some, even as others bank on strong conditions to support solid growth through 2018.

John McManusJOHN MCMANUS

John McManus is an award-winning editorial and digital content director for the Residential Group at Hanley Wood in Washington, DC. In addition to the Builder digital, print, and in-person editorial and programming portfolio, his accountability for the group includes strategic content direction for Affordable Housing FinanceAquatics InternationalBig Builder, Custom Home, the Journal of Light ConstructionMultifamily Executive, Pool & Spa News, Professional Deck Builder, ProSales, Remodeling, Replacement Contractor, and Tools of the Trade.

PUTTING INNOVATION TO WORK

BUILDER

These three keys to changing a company for the better are within every builder’s reach.


Business innovation isn’t rocket science—it’s really just a creative new way of thinking about how to accomplish a goal. But truly innovative home builders are nearly as rare as people who have walked on the moon.

Builders who know how to innovate can reap big rewards. For instance after a Chapter 11 filing in the 1990’s, NVRInc. re-engineered its business processes, focused its business and adopted innovative practices like optioning rather than buying land, making it the most consistently profitable public builder in the time since, and preventing it from losing money during the Great Recession. Today, it’s the leader in several housing markets.

Although companies like this are often viewed as risk-takers, they actually spend a lot of time creating bulletproof systems that keep risk at a minimum. There’s nothing mysterious about these systems, and any successful builder can create them. The most important ones organize three critical areas: Collaboration, Customer Value and Focus.

Collaboration Benefits
Everyone knows that Thomas Edison invented the light bulb, but few realize that he also invented collaborative innovation. In the 1870’s Edison founded what’s considered the world’s first innovation lab in Menlo Park, NJ. It was staffed with research and development teams that are credited with more than 400 electrical patents during its 10 years of operation.

The point is that while we like to imagine geniuses like Edison, Marie Curie or George Washington Carver as creative loners, the truth is that they relied on teams of people that collaborated to bring their ideas to fruition.

Measurable benefits can flow from even the most basic type of collaboration, like the trade council. One builder I worked with was having trouble getting the trades to its sites on time, so we set up a trade council. During the first meeting it became clear that sites often weren’t ready when the builder called the trade contractors. The trades never knew when the builder was “crying wolf” and as a result they became less responsive. Once the builder and its trades put their heads together, the problem became clear to everyone and was quickly solved.

Collaboration is even more essential to a large innovation effort. Take the case of Building Information Modeling (BIM), a subject I have written about in this column.

For BIM to deliver its full value, management has to realize that it’s not an architecture initiative but a transformative business platform with the power to transform every part of the business including marketing, sales, selections, purchasing, estimating, structural engineering, construction, customer experience, warranty and even how the homeowner manages their home. But a collaborative company culture is a prerequisite to that transformation. Just one example: BIM’s automated material takeoffs can save costs by reducing waste and eliminating variance purchase orders, but those savings require collaboration between the purchasing and estimating departments.

Customer Value
A second key to a successful innovation effort is thinking it through from the customer’s perspective. Take the obvious example of how prospects experience your product online. Chances are you will get better foot traffic to your models if the online experience is highly visual and interactive, but to make that happen you need a systematic way of getting customer feedback on how well that online experience is working and how you can improve it.

You also need a system for encouraging people to leave positive reviews about their experience with your company. Like it or not, your prospective customers are going to Yelp, Facebook, Pinterest, Twitter and other applications to find out what your current and past customers are saying about your company. What they find will have a big impact on whether they ultimately decide to contact you.

You can encourage those current and past customers to sing your praises online by providing an outstanding customer experience. A good start would be a “customer concierge”: someone who is responsible for interacting with the customer and who is available whenever the customer has a question or concern. The “concierge” can also be trained to get customer feedback on your innovation ideas, feedback customers should be happy to give if they see you making a real effort to make their experience of building a home a great one.

If you don’t believe this is important just Google “Customer Experience Links to Profit.” You will see stories from Harvard Business Review, Forbes Magazine and dozens of other publishers, researchers and experts. All the research clearly bears out the link.

Even if an idea won’t have a direct impact on customers, in this hyper-competitive business the customer experience is an important lens that should be used to evaluate it.

Staying Focused
Although every successful innovation requires focused effort, that can be a huge challenge for some people. A Microsoft 2015 study on the attention span of smartphone and internet users (in other words, everyone) found an attention span among the average Canadian adult of eight seconds. A goldfish’s is nine seconds. Do I have your attention? Good.

Focus means staying committed to your innovation effort until it has been fully implemented, rather than dropping it halfway through and going on to something else. It also means going all in on that commitment.

This is where a lot companies hesitate. For instance one of my colleagues recently completed a consulting assignment. Although the CEO agreed with my colleague’s recommendations his response was something like this: “Let’s start a small team off to the side of the core business to implement the new policy and see how it goes. Then we’ll decide what to do after we see how it’s working.” My colleague’s brilliant response was “you dabble, you die.”

Of course we always test innovations with pilot projects, but once the pilot has proven the concept it’s time to either dive into the pool or walk away. After all, the criteria for something to be innovative is that it must actually be implemented and deliver results. And while the CEO’s response may sound reasoned and rational, my colleague knew from experience that results of merely putting a toe in the water would be nil. The company would never implement the changes he suggested, the problems they asked us to help them with would never be solved.

Collaborate, consider the customer, and focus on the effort until it has been implemented. This isn’t a complete list of how to innovate but these three elements will take you a long way in the right direction!

Clark EllisCLARK ELLIS

Clark Ellis is a principal at Continuum Advisory Group, a Raleigh, N.C.–based management consulting firm specializing in construction.

HOMEOWNERSHIP PIVOTS TOWARD POSITIVE

BUILDER

Have declining rates turned the corner?


One decimal point. How can one-tenth of one percent of anything be so freighted with meaning? But it is, even factoring in margins of error. It’s part math, part psychology. If Yogi were around, he might say homeownership in America, and its role in American Dreams of opportunity, are 90% mental, and the other half statistical.

The job homeownership performs in America–one it has performed ably for many decades–is to contribute opportunity toward American workers’ social and economic mobility path forward. The Great Recession and its aftermath have made that path more difficult, more polarizing, and more costly.

“The war to win in America right now is the opportunity war,” Jonathan Rose, a transformational leader in fair, sustainable, sustaining housing and community development told me recently. “In 1940, a child born into a family in the bottom quartile of the economy among households had a 90% chance that he or she would do better than their parents. We need to focus on opportunity.”

Americans say they want homeownership. The most recent National Association of Realtors 2017 National Housing Pulse Survey shows that eight of 10 of us say we believe owning a home is a smart financial decision. Yet, the data shows a sharp distinction between what Americans dream of and their opportunity to attain that dream.


[The survey] found that 84 percent of Americans now believe that purchasing a home is a good financial decision – the highest number since 2007. Yet six in 10 said that they are concerned about affordability and the rising cost of buying a home or renting in their area.

Somewhere in there, there’s a mathematical and psychological delta that separates what so many American working family households believe they’re working for and what they expect to attain. It’s the opportunity delta. It’s hard to know whether that delta is expanding, or–if homeownership rate declines stop in their tracks and reverse course–or ready to shrink.


Homeownership rates less-than-inched up, from 63.6% to 63.7%–one decimal point–in the Census Bureau’s Residential Vacancies and Homeownership report for Q2 2017, released yesterday. That change of one decimal point was sequential, from the first quarter to the second quarter of this year. Year over year, the change was more pronounced, from 62.9% in Q2 2016 to 63.7% in the same period this year. Less than a full percentage point, but still.

A couple of areas of brightspots nesting in the data:

One is that rates among the young adult part of the ownership spectrum are stabilizing, even as age 35 to 39 usurps the role ages 30 to 34 once had as the dominant age for people entering homeownership for the first time. New Strategist Press editor in chief Cheryl Russell writes

:
Historically, homeownership became the norm in the 30-to-34 age group—rising above 50 percent. But beginning in 2007, the homeownership rate of 30-to-34-year-olds went into a tailspin. In the second quarter of 2011, the rate fell below 50 percent for the first time. It’s been stuck there ever since. The new age of first-time home buying is 35 to 39, but even this age group has slipped toward the 50-percent threshold.

So, that’s positive news that gets even better as you imagine the 77 million strong Millennial generation crossing that 35-year-old benchmark, which just started happening in 2016.

Also, homeownership rates among 65-plus year-olds–where Baby Boomers are swelling the ranks by the minute–are also holding strong versus historical patterns, according to this look at data from Gallup. Gallup analyst Jeffrey M. Jones writes:

Senior citizens (ahem, that’s you, 65-pluser) have been immune from the trend of declining homeownership. Between 2001 and 2009, an average of 81% owned a home. Since then, 82% report owning their home.

One reason for this stability is that many older Americans may own their home outright because they paid off their mortgage in full or they sold their house and paid cash to buy a smaller, less expensive home. In either case, they would no longer pay substantial monthly mortgage payments, and their ability to afford a home would be less tied to receiving a regular and substantial paycheck than younger Americans’ ability to afford a home is.

Gallup’s Jones also notes that more 65-plus Americans continue to hold down jobs, which is another contributor to homeownership as a housing preference.

Trulia chief economist Ralph McLaughlin, who doesn’t tend to spin or hype the data, has some smart observations on the direction and meaning of homeownership rates here. Here’s a few of his top line observations:

  • It turns out last quarter’s surprise increase in the homeownership rate may be more than just a statistical blip. For the second consecutive quarter, the number of new owner-occupied households formed outpaced renters. Indeed we may have turned a corner when it comes to the steep dive in homeownership we’ve seen over the past 10 years.
  • The damage the Great Recession caused the U.S. homeownership rate may be finally reversing course. For the first time in recent memory, we have a statistically significant year-over-year increase in the homeownership rate.
  • While this is exciting news for champions of homeownership in the U.S., those looking to get into the door of homeownership still face strong headwinds. Prices are again outpacing rents, which makes homeownership less attractive, while the meager supply of homes on the market makes finding a starter home particularly daunting exercise.

We don’t want to read too much into data that’s not decisive nor proven over time. It’s just that if there’s going to be an inflection point, reversing the course of decline in homeownership rates to either a more stable state or one that picks up a few percentage points toward historical averages, it has to occur sometime.

Now might be it. Zillow chief economist Svenja Gudell writes:

Hundreds of thousands of renters are finding ways to transition into homeownership, pushing the national overall U.S. homeownership rate up alongside the national rental vacancy rate. Equally encouraging, many new homeowners in Q2 appear to be young, likely first-time home buyers — the homeownership rate among those 35 and younger rose strongly in Q2 and now stands above 35 percent, its highest level since 2015. There were roughly 84,000 new homeowner households created in Q2, accompanied by a decrease of 104,000 renter households, which suggests that not only are many renters becoming homeowners, but that many are also coupling up, too.

That’s how math works, when psychology’s mixed in.

John McManusJOHN MCMANUS

John McManus is an award-winning editorial and digital content director for the Residential Group at Hanley Wood in Washington, DC. In addition to the Builder digital, print, and in-person editorial and programming portfolio, his accountability for the group includes strategic content direction for Affordable Housing FinanceAquatics InternationalBig Builder, Custom Home, the Journal of Light ConstructionMultifamily Executive, Pool & Spa News, Professional Deck Builder, ProSales, Remodeling, Replacement Contractor, and Tools of the Trade.

Lumber Price Increase Could Affect Housing Costs

New tariffs, lack of supply and increased demand for housing have resulted in higher lumber prices this year

The price of lumber has shot up from last year, a market trend seen as somewhat expected after the Trump administration placed tariffs on Canadian lumber earlier this year.

Lumber prices have increased 17 percent from May 2016 to this June, according to trade reports, which have some in the building industry concerned that the cost increases will be passed along to consumers.

In April, President Donald Trump and Commerce Secretary Wilbur Ross announced tariffs on certain types of softwood lumber coming into the country from Canada, with countervailing duties between 3 and 24 percent.

The countries have also been operating without a Softwood Lumber Agreement, which lapsed last November after standing for 10 years. The agreement’s purpose was to level the playing field between the two countries, which have different systems of timber procurement.

On top of the tariffs, Canadian timberlands, especially in British Columbia, have experienced nearly 400 wildfires this summer, burning up the supply. Todd Morgan, the director of forest industry research at the University of Montana’s Bureau of Business and Economic Research, said the wildfires added to reduced harvest levels already impacted by beetle-killed timber.

“About 30 percent of the softwood lumber used in the U.S. comes from Canada, so when their mills reduce production, it can push prices up,” Morgan said. “And when they increase production, it can push prices down.”

Chuck Roady, director of the Montana Wood Products Association and general manager at F.H. Stoltze Land and Lumber Company, said the increase in lumber prices is also partly due to an increase in demand for housing, now that the economy has recovered and people are making money again.

“A lot of it is due to pent-up demand by the millennials who decide, ‘We better take advantage while we have money,’” Roady said.

New homebuilding in the United States is up slightly, Morgan reported, which would lead to an increased need for lumber.

Lumber accounts for about 10 to 15 percent of the cost of a new home, Morgan said, so the increased prices should affect consumers somewhat. Other factors, such as the availability and value of land, the costs of other building materials, and labor constraints are “probably having more influence” on home costs, he said.

Steve Snezek, executive director of the Montana Building Industry Association, said all of the factors coming together right now are a bit of a perfect storm for higher lumber costs, and that ultimately the consumer will pay for it.

“It’s just one more cost increase that everyone has to deal with,” Snezek said.

Snezek also said that finding log supplies continues to be a challenge for Montana sawmills, and that predicting area closures for logging isn’t easy. Morgan noted that increasing prices for lumber can help sawmills, because they can get more for each board they produce, but it also typically means the stumpage price for those logs goes up.

In some cases, Morgan said, mills may not be able to get enough logs due to local conditions or restrictions.

“If the mills are having a tough time getting enough logs, the higher prices help but not as much — because the mills may need to pay more for logs,” Morgan said.

Roady said Stoltze would be able to meet more of the demand if it could run full shifts with plenty of logs, but competition for the raw materials is intense.

“The stumpage goes up because the competition for that wood goes up,” Roady said. “You can’t run (shifts) if you don’t have enough wood, so then you go pay more for the wood.”

AFFORDABLE SMART WINDOWS HIT THE MARKET

BUILDER

Intuitive glass controls daylighting to improve residents’ Circadian rhythms.

A new window automatically adjusts to block UV rays when it’s sunny outside and let in more light when it’s cloudy.

Gen3 thermochromic windows from Denver-based RavenWindow optimize natural light, block UV rays, and mitigate glare—three key factors for occupant health, wellbeing, and comfort, the manufactuer says.

The thermally activated window transitions from a clear state to a tinted state during peak heat hours, and then back to a clear state as the outside temperature cools, all within minutes. (Click here for video.) With no need for programming, wiring or additional installation, the patented nanotechnology transitions in real-time, blocking UV rays which can lead to health issues and degradation to furnishings. In addition, the light-blocking glass can provide significant energy savings, up to 30 percent on utility bills, the firm says.

Recent research has pointed to a direct connection between natural light stimulating human visual, metabolic and circadian rhythms. RavenWindow’s tint-transitioning technology optimizes natural light to help synchronize these rhythms to promote more alertness, improved mood, and faster cognitive processing.

“RavenWindow reduces solar heat gain, glare and UV degradation while maintaining a view and connection to the outdoors”, says Lance Kling, Regional Sales Manager. “Our products are a fraction of the cost of electrochromic glass and are priced to be competitive with high-performance low-e glass and blinds.”

Jennifer GoodmanJENNIFER GOODMAN

Jennifer Goodman is Senior Editor at BUILDER and has 17 years of experience writing about the construction industry. She lives in the walkable urban neighborhood of Silver Spring, Md. Connect with her on Twitter at @Jenn4Builder.

GEORGIA-PACIFIC MAKES A SWITCH TO GREEN PRODUCTS

Builder

GP recently announced that all UltraStock MDF products are now manufactured using 100% No-Added-Formaldehyde (NAF) resin.

In an effort to provide more building materials for a healthy home, Georgia-Pacific has converted its UltraStock MDF (medium density fiberboard) products to be formaldehyde free.

The company announced that the company has converted all UltraStock MDF products to 100% No-Added-Formaldehyde (NAF) resin, including UltraStock Select, Premium, Lite, MR, Moulding and Embossing. Customers will no longer have to order specific “FREE-branded” products or pay extra for the benefits of an NAF board.

Physical properties, production tolerances and available board dimensions will all remain the same for UltraStock MDF with the exception that the new products’ performance in 24-hour thickness-swell testing have all improved to ≤ 5.5%, which qualifies for an MR10 designation.

Among those in the line, the company’s MDF MR products are moisture resistant, meet reduced thickness swell criteria of 5.5% or less, and meet bond integrity criteria of 50% of original MOR after accelerated aging. The Premium MDF panels are defect-free, cut and route cleanly, feature MR10 thickness-swell, moisture-resistance designation, and can be painted, printed, stained, and laminated easily. The company’s Lite MDF feature all the benefits of the Premium panels, but are also lightweight to reduce the weight of ready-to-assemble panels. The Select MDF boards are well-suited for cutting and contouring applications, such as cabinetry. The Select panels are made of highly refined fiber with a final 150 grit finish suitable for paints, stains, veneers or laminates

Lauren ShanesyLAUREN SHANESY

Lauren is the Products Editor for Hanley Wood’s residential construction group. She holds two bachelor’s degrees in English Writing and Communications from Clemson University.