Ed Hudson, MBA
July 19, 2012
Survey Says... Consumer Austerity Fading, Efficiency Rising
Pundits continue to make a stronger case for a reviving housing industry as more and more future indicators point toward a rebound—like improvements in housing values, building permits issued and houses started, and builder optimism based on showroom traffic. Even Harvard’s conservative “State of the Nation’s Housing 2012” publication took an optimistic turn in their outlook for the coming year. With the rebound looking less distant, those who are banking their futures in this industry should ask themselves some important questions. What will be driving trends in home design and materials selection as the recovery unfolds? Will it be more like the pre-recession industry? Or, are there some fundamental changes that are taking place in home buyer demand?
Tracing the changes in the past few years provides a backdrop for where the market may be going. First, the housing industry crash sent the industry into a hyper-competitive mode where new homes became decidedly more upscale in size, features, and materials selection—even though this seems irrational when you consider the average price of new homes continued to fall in the years following the housing downturn. The Great Recession, however, put the brakes on the escalation of high-end materials, and a sense of sobriety in home purchase decisions began to take hold. Beginning in 2009, homes began to get smaller and low-cost finish materials began to make a comeback. Was this (finally) the first sign that the “new frugality” was taking hold in housing? Or, was it just a temporary reaction to economic uncertainty? Or, did low appraisals discourage the use of high-cost materials and lavish (but inefficient) home designs? Or, was it just the natural consequence of the first-time homebuyer tax credit that favored low-end purchases?
All of these factors have played a substantial role in shaping the current housing environment—but what about the next few years? I believe we are already seeing clues as the tide is now beginning to turn based on the results of our recent Annual Builder Practices Survey (ABPS). It is clear that 2011 was a year the market turned a corner—not as much in number of homes constructed, but in preferences in materials chosen to build homes. Two key themes emerged: the pace of improving home energy efficiency is picking up sharply and the recession-induced attitude of austerity is fading.
The ABPS findings show that new home insulation levels have experienced the largest increase in decades—especially in walls, where the average R-value of cavity insulation increased from R-15 to R-16. Insulating foam exterior wall sheathing, after decades of declining popularity, is becoming more popular, especially as a second layer installed over plywood or OSB. Spray foam insulation and loose fill fiberglass systems continued to gain ground as wall cavity insulation materials. The declining cost of natural gas in the past few years has led to a strong return to natural gas for water and home heating as well as cooking appliances. In 2006 about 39% of all cooking appliances in new homes were gas—by 2011, their share jumped to 50%.
Edging Away from Post-Recession Austerity
The most apparent trend toward pre-recession upscale finishes is seen by the rebound use of natural wood and stone interior finishes shown in the ABPS. During the recent recession, granite kitchen countertops fell precipitously from about 52% to about 38% of all new homes but have since rebounded to about 58%. This gain came at the expense of high-pressure laminate, solid surfacing, and ceramic tile countertops. As a vanity countertop, granite fell to about 18% during the recession but has risen sharply to about 35% at the present time, while synthetic or “cultured” marble declined. Natural marble is also getting more attention as a vanity countertop material, nearly doubling its share to 7% in the past couple years.
Also gaining a lot of ground since the recession has been wood flooring. Prior to the recession, wood (solid and engineered categories) peaked at a 22% share of flooring in new homes. In 2009, it had declined to about 19%. Since that time, wood flooring has rebounded to 24%, surpassing its pre-recession levels. Currently, more than half of dining rooms in new homes have wood floors, and its popularity is spilling over to living rooms, family rooms, and great rooms where we have seen the greatest increases in recent years. Wood exterior and patio doors have also seen a rebound since the recession but not yet attaining their pre-recession levels.
So where are the biggest opportunities when the housing market rebounds? Since housing prices are still very soft, we cannot conclude that products and materials, by virtue of being more energy efficient or more upscale, are guaranteed builder and consumer acceptance. The market for new homes is extremely competitive—two important keys for success in the recovering market are understanding what customers value the most and being able to readily communicate it to buyers. Energy efficiency and natural materials on interiors are two materials that builders have discovered to provide superior value to buyers, but there are other opportunities as well.
The housing market crash and recession have taught the new home construction industry some painful but valuable lessons in quality construction and efficiency, and I am confident we will not be heading back to the same market conditions that preceded the downturn. Successful players in the housing market rebound will be delivering “the most for the least” at the closing of the sale and when the first energy bills begin to arrive.
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