Opportunities exist — the trick is knowing where to find them.

By Dianne M. Pogoda

 

The rapidly changing housing market is being influenced by so many economic factors, it’s hard to know where to look for opportunities and plan for the business of tomorrow. 

NKBA CEO Bill Darcy invited Ali Wolf, Chief Economist for housing market research firm Zonda, and Todd Tomalak, Principal of its Building Products Advisory, at NKBA’s Futurist Summit to share insights about where the market is headed based on numerous economic factors.

The Summit was presented in partnership with Zonda.

Darcy asked the duo to discuss trends and developments including the Federal Reserve Bank’s 0.75 percent rate hike (its 4th this year), and the nearly 1 percentage point decline in GDP in the 2nd quarter — the second straight quarterly decline in 2022. He said that during a recent meeting, “Fed Chair Jerome Powell stressed how important it was to raise rates to tame inflation and lessen demand. He presented a strong, confident position that indicated that more rate hikes are on the way to cool the overheated economy.”

The danger is that if the economy stalls too much, there’s a good chance of falling into recession. But Wolf said a key thing to remember is that conditions defining a recession changed back in the 1980s. While many still look at two straight quarterly declines in GDP growth as a sign of recession, technically those parameters have changed. “It’s a significant decline in economic activity across multiple sectors that lasts more than a few months,” she said. “There’s definitely been a slowdown in growth. But we have yet to feel the full effect of any recessionary environment. Housing activity has slowed considerably, but we are still in the early innings of how a recession ultimately progresses.”

As far as housing and real estate specifics, she said there are a lot of moving parts. Housing market changes are related to affordability as well as consumer confidence. Interestingly, while the Fed is raising short-term interest rates, mortgage rates are coming down, to the 5 percent range. “Our belief is that we’ll see the most dramatic drop in housing activity in 2022, and it will remain soft through next year.”

Tomalak said the historic high in home equity held by homeowners is a critical factor, but not the only factor, in keeping recession in the housing market at bay. He noted that even if home prices drop by 10 percent, we’ll still only be back to levels seen in mid-2021. “We’re in a low-mobility environment, with people moving half as much as they did 20 years ago. That means most people have more equity in their homes, and they’re flipping less frequently and spending on their existing home. Plus, there’s a very low presence of subprime home loans out there now, putting us in a stronger place than we were in the prior cycle.”

Tomalak said the rental market is interesting, particularly the single-family rental (SFR) market, which is gaining traction among very young families who can’t yet afford to buy a home, and new retirees. “The thing with seniors is that they’re usually coming from a very nice home, and the likelihood that they will trade down is low. So the fit and finish in rooms like kitchen and bath become more important,” providing opportunities for K&B remodelers.

The Affordability Factor

The pandemic drove prices up on houses (and just about everything else), but if conditions revert to 2019 levels, does that mean that housing prices would also fall back? Wolf said there are a number of underlying factors that make this unlikely.

“In 2018, 35 percent of new homes were priced below $300,000,” she said. “Today, it’s 10 percent. There are a few reasons. First is land — it’s a finite resource, and once it’s gone, it’s gone. So anyone holding land in a great location is holding gold. Second is labor, and we all know how tight the labor market is. Third is regulation — it takes longer for permitting, inspections, etc. And fourth is NIMBYism [Not In My Backyard] – it impacts the ability to get more homes built and that causes prices to rise and stay high.”

Tomalak added that more than half of home remodeling projects are being financed by HELOC — home equity lines of credit — or refinancing. People have been living in their homes longer so they have more equity to use. And when projects are financed by HELOC, the average ticket for kitchen and bath doubles, he said.

What Can Remodelers Do?

Wolf advised remodelers to look at the business from a holistic point of view. “Track what you’re seeing in your sector, how it performs in recessionary times, and how it’s performing compared to other industries and sectors. Try to stay as nimble and flexible as possible, and look at the long term.”

Darcy added that maintaining relationships with vendors and customers and keeping communications open will help keep inventories and projects going.

Todd concluded, “This is definitely a challenging environment, and we have to be realistic about the unknowns that are out there. But there are definitely opportunities. Know where they are, and avoid the spots that get dangerous.”

The NKBA Futurist Summit, sponsored by Signature Kitchen Suite, is available to watch on-demand here.