Stock market volatility. Brexit debates. The government shutdown.
It’s easy to feel overwhelmed by uncertainty these days, particularly in the wake of the Great Recession a decade ago. But as the late CBS commentator Eric Sevareid once said, “I’m sort of a pessimist about tomorrow but an optimist about the day after tomorrow.”
This view is relevant today. While the drop in materials prices won’t be helpful to distributors that don’t manufacture any products, there’s much cause for continued optimism.
The M&A market is still busy, because many groups view this as a good time to invest in construction supply companies. They know there’s a big difference between a slight slowdown in the speed of economic growth and an actual recession that sees the gross domestic product shrink for two consecutive quarters. For reference, the latest Federal Reserve forecast, at press time in early February, called for about a 2.5% rise in GDP in 2019, down from 2018’s 3.1%. These investors also have a longer-term view about growth prospects. They think in terms of years, not months or quarters.
When you examine conditions using a more distant horizon than a day trader’s viewpoint, things look promising. Unlike the Great Recession, when housing starts declined by 75%, the starts rate in 2019 is expected to do no worse than hold steady. Even if a recession were to come, housing could benefit because it would hold interest rates down while home prices probably would rise amid rising demographic pressures.
“This could be a particularly big cycle for household formation, owing to the millennials,” Thomas J. Thornton, head of U.S. equity product management at Jefferies & Co., wrote in a recent client newsletter.
Construction labor remains extremely tight. Factory-unitized products and off-site construction married with on-site modular installation have never been more popular. Companies like Katerra and Entekra were able to raise hundreds of millions of dollars of investor capital because of the desperation in the market to solve the labor shortage issue and keep up the pace of building.
Meanwhile, remodelers have never been busier. Late last year, Harvard University’s Joint Center for Housing Studies predicted annual home improvement spending by homeowners will rise by at least 10% in 11 major metro areas and by 5% to 10% in 40 other markets. Economic hiccups since then might lead the Center this April to moderate its predictions a bit, but they’ll still call for vigorous growth. Meanwhile, Metrostudy (a sister brand to ProSales) believes economic conditions that favor remodeling market gains will keep improving through 2021, despite some of the same warning signs.
For their part, nearly all LBM distributors with whom we’re in touch are calling for positive year-over-year growth in 2019. The consensus among industry participants seems to favor the idea that we’re headed for a slowdown. However, everyone seems to be predicting it will take place in the next state or region over. So, are we headed for a soft patch or another couple of years of steady, but not overheated, growth?
If, indeed, there is a soft patch in the next two to three years, it should be brief by the standards developed in the last recession. None of the mortgage abuses or other factors that contributed to the 2004 to 2006 housing bubble is taking place right now. Declines in builder confidence as measured by NAHB’s Housing Market Index at the end of 2018 were driven by concerns that home price increases had gotten ahead of incomes. That would have been an elegant problem to have in the last recession. Market fundamentals are still sound.
