Annual Report 2011 - May 2011

Introduction by Darius Helm, Statistics by Market Insights/Torcivia

The first half of 2010 saw a solid uptick in residential business, largely due to the federal tax credit for new home buyers, and that dried up at the end of May and was sluggish for the balance of the year. Commercial business started off poorly, with the market still reeling from the financial crisis, but it turned positive in the second half of the year.

The traditional trend in recessions is for the commercial market to lag behind the residential market, both in the downturn and the recovery. This time around, though, the commercial slowdown has been sandwiched within the residential recession, which is now in its fifth year.

There is, however, no mystery to this divergence from the norm. The impact of the protracted slowdown in the housing market led to a traumatic event in the financial market in late 2008, generating a credit crisis without precedent. What is surprising, though, is the brevity of the commercial slowdown, which turned around in about a year and a half. However, what’s missing is the rapid growth usually seen at the beginning of rebounds. Markets, both global and domestic, are still fragile, but it’s starting to look like the trend is toward increasing stability.

It’s not clear yet when the U.S. residential market will start moving back into a growth mode, but it appears to have finally stopped its decline on an annualized basis. The entire flooring industry, from its peak in 2006 to the valley in 2010, has lost 34.5% of its value.

Last year, ceramic was the fastest growing flooring category, with its share of the market moving from 8.9% to 9.5%. Hardwood, vinyl and rubber were each up a tenth of a point, and laminates were down from 6.6% to 6.3%. The area rug category showed no shift in share last year, but carpet was down. Carpet’s share fell from 46.9% to 46.3%, and it’s down from 52% in 2005. Within the carpet category, broadloom continues to lose significant marketshare to carpet tile, and that trend is expected to continue. Lower priced carpet tiles have helped secure that advantage.

Despite the continued loss of share by carpet to the other flooring categories, the U.S. market is unique in terms of the dominance of carpet. Hard surface flooring is much stronger in Europe and Asia, and even in Canada.

According to Market Insights/Torcivia, the U.S. flooring industry was up 1.9% in 2010, going from $15.69 billion in 2009 to $15.98 billion. This year should see more growth, though there’s plenty of uncertainty and significant challenges.

One of the biggest challenges is coming from raw material prices, which have been rising since midway through 2010. Perhaps the biggest impact on raw material pricing comes from the U.S. Federal Reserve’s policies of “quantitative easing,” which have steadily weakened the dollar. That helps U.S. exports but causes imports to the U.S. to be more expensive, and most raw materials are imported. This holds true pretty much everywhere except China, which manipulates its currency to the U.S. dollar to protect both its market and its investments. That’s a big part of why imports from China have such a strong position in the U.S. market.

A lot of raw materials are imported from Canada, and the U.S. dollar has weakened so much against the Canadian dollar that it’s more or less a one to one exchange rate.

Sector Update
On the commercial side, the corporate sector has come back to life, though jobs are generally smaller and the shift has been toward refurbishment rather than new construction. The healthcare sector seems to be holding its own, with assisted living outperforming acute care. In education, K-12 has suffered more than higher education as a result of tight state and local budgets, but there are big differences regionally. The retail sector has seen activity in renovations, but no real increase in footprints. And just recently the hospitality sector has become more active. There’s always a lot of pressure on the retail and hospitality businesses to renovate, even if business is off.

On the residential side, this year is expected to be stronger than 2010 on the multi-family side. Occupancy rates are up, suggesting that several years of people moving into smaller spaces or moving in with other family members has finally reached a saturation point. Also, improved employment numbers may be helping accelerate this trend.

Most manufacturers report that higher end price points have seen more activity over the last year, and this relates directly to the rebound in the corporate sector. Most notably, sales at the Dixie Group, which focuses on high end business, rose by 14% last year. Sales and profits are up in many U.S. firms—with the fourth quarter of 2010 posting the best performance of public companies since 2004—and the extension of the Bush tax cuts should help maintain the growth at the higher end.

Housing Starts and Permits
The outlook for the housing market is still uncertain, and it looked like it was still weakening for the first two months of the year, but in March some indicators started moving in a positive direction.

According to the U.S. Commerce Department, March housing starts rose 7.2% to a seasonally adjusted annual rate of 549,000 units, with gains in both the single-family and multi-family markets, and with building permits also rising in the same month. The hope is that, following January and February, where bad weather across much of the nation slowed the market, the spring buying season will show steady month by month improvements.

In March, single-family starts were up 7.7% from February, and multi-family starts were up 5.8%. Regionally, the biggest gains were in the Midwest and West, at 32.3% and 27.6%, respectively, while more modest gains of 5.4% were seen in the Northeast. However, starts were down 3.3% in the South.

Even though those numbers are moving in the right direction, that volume is still about half of what is generally acknowledged to be the healthy rate, which is 1.1 million starts.

Building permit issuance was also up in March, rising 11.2% to a seasonally adjusted rate of 594,000 units. Significantly, while single-family permits rose 5.7% to 405,000 units, multi-family permits were up a whopping 25.2% to 189,000 units.

Building permits were up the most in the West, at 37.1% over the previous month. Permits were up 6.9% in the Midwest and 6.3% in the South, and they were flat in the Northeast.

Home Sales Update
The National Association of Realtors (NAR) reports that existing home sales—reflecting completed transactions of single-family homes, townhomes, co-ops and condominiums—rose in March by 3.7% to a seasonally adjusted annual rate of 5.10 million, and that’s against February numbers, which were revised upwards to 4.92 million. Sales were down 6.3% from March 2010. However, the March 2010 numbers were elevated by the home buyer tax credit. With March’s increased activity, that means that six of the last eight months have shown growth in existing home sales.

Regionally, existing home sales were up 8% in the South, 3.9% in the Northeast and 1% in the Midwest. However, they were down 0.8% in the West.

Unfortunately, the barrier to home purchasing remains substantial, despite very attractive mortgage rates—the national average in March was 4.84% for a 30-year fixed rate loan. Average credit scores for conventional mortgages have risen to 760 and scores for FHA loans are up to 700, from 720 and 630, respectively, in 2007.

However, the bigger barrier may be downpayments, which have risen significantly and are out of reach of many potential homeowners, even those with great credit scores. According to Lawrence Yun, NAR’s chief economist, “Low-interest downpayment loans should continue to be available for those consumers who have demonstrated financial responsibility and are willing to stay well within their budget.”

Foreclosures continue to have an impact on the market, depressing the new home market on the one hand and lowering the average costs of a home on the other. Median existing home prices stood at about $159,600 in March, down 5.9% from March 2010, and distressed homes accounted for 40% of marketshare in March, up 39% from February and 35% from March 2010.

Total housing inventory at the end of March was up 1.5% to 3.55 million existing homes, an 8.4 month supply at the current sales pace.

New home sales were up 11.1% in March to a seasonally adjusted annual rate of 300,000 units, according to the Commerce Department, and January and February numbers were revised upwards. However, February’s new home sales, at an adjusted annual rate of 270,000, were the lowest in four decades. And March’s numbers were still down 21.9% from March 2010.

Regionally, the Northeast was strongest, with new home sales up 66.7%, and they were also up 25.9% in the West and 12.9% in the Midwest. However, sales were down 0.6% in the South.

For an indepth look at the various flooring categories, see the May 2011 issue of Floor Focus.

2011 Floor Focus