Article Number : 3018 |
|
Article Detail |
|
 | |
| Date | 2/26/2008 9:48:37 AM |
| Written By | LGM & Associates Technical Flooring Services |
| View this article at: | //floorbiz.com/BizResources/NPViewArticle.asp?ArticleID=3018 |
| Abstract | By Steven Feldman ORLANDO, FLA.—The steep decline in the housing market is the underpinning for the woes that have plagued the flooring industry for the last 18 months... |
| Article | By Steven Feldman ORLANDO, FLA.—The steep decline in the housing market is the underpinning for the woes that have plagued the flooring industry for the last 18 months. And any manufacturer, distributor or retailer who is wondering why their business is struggling need only look as far as the recent International Builders Show, which served as a microcosm as to the state of the industry. If nothing else, the show, which this year attracted only five of the country’s top 25 builders, provided some answers. “No one nationally from D.R. Horton, Pulte or Centex, the top three builders, said they were coming,” said Curt Robinson, national sales manager of builder products for Armstrong. “It’s the state of the industry for one. They are trying to save costs. Some are looking toward a fresh start next year in lation efforts and new product development. They see it all the time, so do they really need to come to the show to see what we talked about a month ago?” The numbers are staggering. Companies like Toll Brothers, which built 8,900 homes in 2006, will construct less than half of that figure this year. Tract builder C.P. Morgan, which built 3,000 homes in each of the past two years, will cut that number by 30% this year. And they’re the lucky ones. Former top-40 builder Levitt Homes went Chapter 7 late last year, and many others are said to be considering filing Chapter 11. The dramatic contraction in the housing market is the primary driver of this country teetering on the brink of recession and the reason why floor covering manufacturers, distributors and retailers are struggling. Some economists, like David Berson, The PMI Group, believe the economy fell into recession in December. At this point it’s only a matter of semantics. The facts are such that when it comes to housing, nothing is going to improve anytime soon, and most indicators suggest it will continue to get worse before it gets better. So what’s fueling this downturn? “The biggest problem is in the financial markets,” said Dave Seiders, chief economist for National Association of Home Builders (NAHB). “The credit crunch that has developed is a big deal. It has been triggered by the debacle in the sub-prime mortgage market. Pieces of those loans are all over the world in terms of investments. That is the biggest uncertainty in the overall outlook and what the Fed is most worried about.” Frank Nothaft, chief economist, Freddie Mac, noted that banks are scrutinizing borrowers seeking to buy homes, turning down a vast majority of applications. “It’s a very challenging environment for the sub-prime borrower with a low credit score,” he said. “There has been an entrenchment in underwriting and tightening of credit standards. It’s very difficult to get a mortgage right now, especially in areas where home values have decreased significantly. However, if you are a prime borrower looking for a conforming loan, can qualify for a full doc loan and can put a good down payment, things are looking pretty good. Rates are at their lowest in two-and-a-half years. I expect them to remain around 5.5% through 2008.” PMI’s Berson believes delinquencies and defaults will not improve until mid-2009 at the earliest. “Defaults are coming from loans that were underwritten poorly to begin with.” But the interesting thing is more delinquencies are occurring with ARMs (adjustable rate mortgages) before the adjustment period. So what will happen after the adjustment period? Probably more defaults. “There was a greater opportunity for sub-prime borrowers to refinance before home values dropped. But because they did not have the money to put down, odds are they do not have the money to refinance now that home values have dropped. Now the value of their home has fallen below the loan amount.” Seiders is the most optimistic of the trio. While he forecasts housing starts down another 22% in 2008 (after a 26% decline in 2007), he has existing home sales stabilizing in the second quarter and showing some systematic improvement later in the year. “Given the dimension in inventory, the recovery in housing starts will be delayed,” he said. The inventory issue is also part of what’s driving down home prices, according to Nothaft, the other being foreclosures. “We still see high levels of unsold homes, which serves to depress home values. And I think things on the foreclosure front will only get worse. Foreclosures can have a depressing effect on home values in areas where they are located. I expect values to decrease through 2009.” Berson added that when the dust clears, home prices will have fallen 15% on average from peak (2006) to trough (2009). The builder perspective C.P. Morgan, one of the top 25 builders in the country doing business in Charlotte, N.C., and Indianapolis, admits business is slower than anyone would like. “In Indianapolis, we had a significant amount of overbuilding with little to no job growth,” said Ryan Hammoudeh, corporate director of purchasing. “In Charlotte, the problem is getting someone pre-approved for loans. Rates are near all-time lows and land prices are coming down, so it is a good time to buy a house. So it’s external factors, like lending, that are affecting the issue. Mortgage companies are paying increased attention to buyers’ finances. You may qualify today, but buy a car or an appliance tomorrow and you may not. Lending and overbuilding are 90% of the problem.” So what does a builder do in this environment? In C.P. Morgan’s case, Hammoudeh cites a partnership approach with each of its trades. “We never demand price decreases,” he said. “Rather, we work with suppliers in more efficient ways to reduce costs. We find innovative new products to cut costs, capitalize on efficiencies and give buyers more choices.” In terms of specific flooring products, Hammoudeh said the builder is finding favor with DuraCeramic from Congoleum and some of the green initiatives launched by Shaw and Mohawk—although he notes that green is not as popular in the Midwest as in other areas, particularly at an entry-level price point. C.P. Morgan’s average home costs between $140,000 and $160,000. Product is also becoming more important for the builder as it finds its homebuyers are caring more about style and design than ever before. “It’s always been a factor at the upper end, but now that is transcending all the way down to the entry level,” he said. “So for us it’s a balancing act between cost, design and quality. The challenge is to continue to meet the needs of more and more diverse buyers.” |