The Residential Market Downturn Signals Challenges for Building Products Manufacturers

 

Recessions are often just repricing periods, and the market is transitioning from an era of rapid home price increases to one that is quickly cooling due to rising mortgage rates. As a result, it will be critical for building product manufacturers to understand how the transition in the residential market will impact the demand and selection of their products.

In early November, the Federal Reserve enacted its sixth interest rate increase this year, raising the federal-funds rate by 0.75 percentage point and bringing the range to between 3.75% and 4%. With the average 30-year fixed rate mortgage sitting at approximately 7%, as of mid-November, potential buyers at this point are likely several months into reassessing the purchase of a new home.

Several major homebuilders have experienced declining new orders and increasing cancellations. FMI is forecasting a 12% decline in single-family residential construction spending in 2023 and for the multifamily segment to begin declining in 2024, according to the fourth quarter Outlook. And based on latest data, these forecasts are beginning to look optimistic.

The market is pivoting. We are moving from a period of significant price increases where people were not price sensitive when it came to upgrades or purchasing new, innovative products to one where cost matters. Manufacturers and builders were in control of products since people were enamored with high-end options and didn’t mind paying more for them. Now that’s changing.

Currently, home prices remain high and so are mortgage costs. As a result, buyers are becoming more price conscious and paying more attention to what and where they’re spending money. The control is transitioning more to the buyers’ hands and their decisions are being driven by caution and price.

Given where we are in the cycle, FMI expects to see a greater emphasis on builders focusing on creative ways to reduce costs, particularly around products that are upgrades or luxury options for consumers. Building products companies that previously differentiated themselves by offering innovative products, such as smart faucets, will likely see buyers placing orders for more cost-conscious replacement options.

Impact to Building Products Manufacturers

The repercussions of this repricing and shift toward less expensive developments is expected to have profound implications for the building products industry over the next several years. Many that were offering luxury or innovative items, especially fixtures and finishes, will likely experience significant volatility in demand as more homebuyers move to lower-cost replacement options.

Two years ago, buyers were looking for innovative technology and products with luxury aesthetics. Homebuyers were willing to pay more for touchless faucets, programmable shower heads and other products. Builders offered increasingly expensive high-end packages, and rising home prices supported those decisions but were only supported and masked by the investment proposition of a rapidly appreciating asset.

Now, with home prices stabilizing or declining in many markets, product selection will see an emphasis on supply chain efficiency and price, with the availability of products and their price being competitive as key drivers of selection. For building products manufacturers, that means having readily available products at specific price points. You must have a strong supplier network and channels to the market. Building products manufacturers need to understand and think about how to adjust to address these changes, particularly as buyers gain greater control and emphasize price.

Where to Begin

When it comes to planning, there are several questions you should consider asking to get started. These include:

• What’s the outlook for my current markets and products? What is underpinning demand moving forward?
• How are our products positioned to meet customer demands?
• How can I grow share in my existing market or with my current products?
• Are there simple innovations we could make to capture more share?
• How can we asses new or alternative product options? Can we quickly bring those to market?
• Where are the growth opportunities and how can we best address them?

As the transition in the residential market continues, firms that take the time to understand how product selection is changing, which products are being selected and how this varies across operating geographies will be in a more favorable position in the coming year(s) to quickly adjust and evolve their product strategy to win in the market.