Homebuilding Decline Affects More Than Home Builder

Implications: The home building industry remains depressed and builders are reporting falling revenues and big losses.  For those who survive, will the infrastructure of suppliers, distributors and tradesmen be there to support them for the next "up" building cycle?

Analysis:  The US homebuilding industry remains mired in the worse possible scenario with low demand and high inventories, and the outlook for 2008 is bleak.  New home construction has slowed dramatically and the inventory of homes, both new and resale, is at the highest level ever as foreclosures add to the problem.    While our concerns are mostly focused on the home builder and his ability to survive this lengthy down cycle, we tend to overlook the infrastructure of manufacturers, suppliers and services that are critical to the industry and to a builder’s success.  These behind-the- scenes businesses are fighting for survival as well.   Let’s look down the building products supply and services chain and consider the wood products manufacturers, the distributors, home building crews, subcontractors and all other builder-support entities.  As the builder stops building, so do the producers slow the manufacture of all the materials used in the construction of a home – windows, doors, glass, paint and stain, countertops, lumber, plywood, oriented strand board, particleboard, MDF, engineered wood components (such as floor joists, headers, rimboard), wallboard, fiberglass, house wrap, nails, bathroom and kitchen fixtures, tile, carpeting, lighting, concrete, caulking, etc., etc., etc.  This list brings to mind a few of the major corporations, such as Weyerhaeuser, Dupont, Pella, US Gypsum, Trane, Sherwin Williams, Kohler and Masonite, among many others.  Between the manufacturer and the builder is the layer of building products distributors who provide the mix of just-in-time components to the builder.  Included here are Weyerhaeuser (again), GP-Blue Linx, Boise Cascade, United Building Centers, Universal Forest Products, and the many medium and small, regional multi-location yards (84-Lumber, Diamond Hill Plywood and Carolina Builders come to mind).   And one step down are the smaller but key “lumber yards”, and there are many of these as well.  And let’s not forget Lowe’s, Home Depot, Menards and the other big boxes.   I would be remiss if I were to omit the true “trade” workers in the building industry in this commentary.  Here, I include the electricians, plumbers, drywall applicators, painters, roofers, framing crew, deck and porch builders, heating and AC technicians, swimming pool specialists, landscapers, trim carpenters…the list goes on and on.  As the builders, manufacturers and distributors struggle to survive as projects decline, a key question is whether the talented workers in the building trade can last through this extended down time.  True, home repair and renovation opportunities may absorb some of the workers for small, one-time projects.  But for many, they may have already been forced to “move on” to something else.  Once US home construction begins to appear heading toward “normalcy” (whatever that is), can the builders who survive be able to assemble their talented and trusted crews and subs to take on the new work?  All this remains to be seen, as we will also have to wait to see which mainstream manufacturers and distributors are around to participate in the new building cycle.       What’s the best we can hope for in 2008?  Ideally, the subprime mortgage issue is somehow quickly resolved, foreclosures drop and people retain their homes, which appreciate as unsold inventories decline.  Hopefully, the low mortgage rates will incent buyers.  But even if all this comes to fruition, builders will be cautious to begin large new projects without first seeing the demand from the home buyers with good credit.  For sure, after all is said and done, the survivors will be lean and mean…and maybe not as optimistic that the US can ever again experience a multiyear housing boom without longer term negative implications.  Caution will definitely prevail.