Focus 100 Retail - November 2009

By Darius Helm & Kemp Harr

By most estimates, 2010 will be a welcome year in the floorcovering industry. Financial markets will likely continue to stabilize and banks will pick up their lending. Consumers will start spending again, but cautiously. The flooring business will grow, by as much as 6% by some estimates. Movement will be in the right direction.

This year, it seems, was all about finding the bottom. A year ago, the financial crisis hit hard. Not long after a winter thaw, the falling residential flooring market appeared to decelerate, as though the chute had finally opened, and by late summer, retailers, distributors and manufacturers were all talking about having bottomed out. (The commercial market is another story.)

The last few months have been somewhat unsteady, as though the bottom features quicksand and the occasional deadfall. And even as retailers have been reporting that finally the ground beneath their feet feels firm again, unemployment numbers, lending issues, and the looming end of the housing credit for first-time buyers are generating ripples of uncertainty.

The general consensus is that the recovery is likely to be slow, yet there are a few notable optimists who are predicting a V-shaped recovery. Only time will tell who’s right. There should be plenty of pent-up demand, but it’s hard to say how fast that will convert to flooring sales. For now it seems clear that lifestyles and buying habits have changed in the interim, and nobody has the stomach for reckless abandon. Credit problems could also continue to slow growth.

In fact, the biggest impediment to the nation’s economic recovery may well turn out to be consumer sentiment, which has been up and down the last few months but has generally been trending higher. Consumer spending makes up roughly 70% of the economy, but it can ebb and flow based on factors like the price of gasoline that are subject to many forces.

The movement of the population over the last three years has had a profound impact on the flooring industry. As people moved from their homes, the multi-family market experienced a passing boost in business, though even those gains were moderated by diminishing condo business. 

Since then, people have been squeezing closer, taking up less real estate—literally. They’ve fled the rental market, in some cases moving back in with parents or other relations, generating in their wake a vacancy rate of 7.8%, the highest rate in 23 years, according to real estate research firm Reis Inc..

An even bigger effect on the rental market comes from unemployment numbers, which have already crossed the 10% mark in 14 states. With weak demand and with unemployment expected to rise at least a while longer, the multi-family market is poised to slow next year. However, once the economy starts to grow, that market will rebound faster than others.

Right now, the bulk of the activity in the multi-family market is in replacement rather than new construction because of how difficult it is to get financing for new construction.

Housing Market Update
Over the summer months, housing starts went up, but they stalled in September, edging up only half a point, while new building permits fell 1.2%—flooring business is typically six to nine months behind housing starts. Starts of single-family homes were up nearly 4%, and multi-family starts were down over 15%. By contrast, single-family permits were down 3% while multi-family permits were up over 5%.

Regionally, starts were down the most in the Northeast, at 11.5%, followed by the West at 10.2%, and the Midwest at 6.1%. Starts were actually up 7.5% in the South.

Following solid gains from April to July of a total of 15.2%, existing home sales fell 2.7% in August, though they were still 3.4% higher than in August 2008, according to the National Association of Realtors. Single-family existing home sales were down 2.8% compared to 1.6% for condo and co-op sales.

Existing home sales, following four months of growth and a reversal in August, grew again in September, according to the National Association of Realtors. Sales were up 9.4% to a seasonally adjusted annual rate of 5.57 million units, 9.2% higher than the rate in September 2008. Existing home sales haven’t been this high since July 2007.

Conditions were strongest in the West, with existing home sales up 13% from August and 5.7% higher than in September 2008. Sales were up 9.6% in the Midwest, 7.8% higher than last September, and they were up 9.0% in the South, and nearly 11% higher than last September. 

Existing home sales were slowest in the Northeast, up only 4.4% from August, though that was 11.8% higher than last September’s numbers.

By the end of September, housing inventory fell 7.5% to 3.63 million homes, a 7.8 month supply. Inventory levels were 15% lower than a year earlier.

Over the last few months, sales have been helped by an $8,000 tax credit for first-time home buyers (which is scheduled to expire November 30 but could be extended or even expanded), as well as attractive mortgage rates. The average 30 year fixed rate mortgage is just over 5%, about a point lower than where it stood last year.

New home sales were up a hair in August (0.7%), but down 4.3% from August 2008. Last year, there were only 485,000 new home sales, the worst year since 1982, compared to 1.23 million in 2005, the peak of the market.

Regionally, there was a lot of variation. Sales were up 12% in the West but down 6% in the Midwest and 16% in the Northeast, with the South about even.

As winter looms, activity ebbs in the housing business, and with the expiration of the tax credit, numbers are unlikely to look too good until the spring, when we’ll get a much better idea of the direction of the housing market.

The Residential Flooring Market
Retailers report that business conditions are still tough in most of the hardest hit markets, like Las Vegas, southern California, Arizona and Florida, along with parts of the Midwest, like Michigan. One market that never fell that far and consequently has been quicker to stabilize is Texas, where many retailers report relatively strong activity. And it might be a small market, but it’s worth mentioning that North Dakota has also held up well.

One region that was slow to weaken was the Pacific Northwest, but conditions there have deteriorated over the last year or so, though the market has not fallen as far.

Flooring retailers report that homeowners are shopping a lot longer before purchasing. They know more about the product when they walk in the door, and they want to negotiate. Most retailers also agree that issues like service, longevity and maintenance are more important than before—along with price.

When it comes to flooring products, there haven’t been huge shifts in product categories as much as shifts in price point within categories. Homeowners aren’t demanding the same product for less—they’re just trading down within the same category. The same holds true for home builders, who are doing fewer upgrades and going with more standard materials than in the past.

There have been some product shifts. Hardwood is down, particularly among flooring contractors. Ceramic is down in both the builder and residential replacement markets. Carpet is up in some markets and down in others and the same holds true for rugs. And while some retailers report comparatively strong laminate sales, most claim that laminate business is down.

The only sure winners in this market seem to be luxury vinyl tile and glass-backed sheet vinyl. Those two vinyl products have been a bright spot for most retailers, with LVT perhaps shining more brightly.

Looking ahead, there are signs that flooring manufacturers are poised to boost production early next year. And though pent-up demand will not be like it was in recessions past, there will be surges here and there. That could be good news for carpet in particular, since it’s the floorcovering most likely to need replacing.

For the complete Focus 100 Retail story and listing of the top 100, see the November 2009 issue of Floor Focus Magazine.

Copyright 2009 Floor Focus