Builder Update: FEI Group's Jay Smith
Interview by Kemp Harr
With the recent recovery in the builder market, it is a good time to take a look at where this segment has been, where it is now and where it is going, so I sat down for a conversation with Jay Smith, president of FEI Group, the flooring industry’s largest organization for flooring contractors servicing the builder and multifamily segments.
Q: To get started, let’s go back and talk the boom and bust cycle of just a few years ago. What are your observations?
A: The market was super charged. Everybody was slammed and business was very good. It seemed that home prices had only one way to go—up. The prevailing thought at that time was that all housing is local; there is no such thing as a national housing market. Therefore, when talk of a housing bubble first surfaced, many thought a bubble was for the Internet, not for real estate. Then, by late 2006, it was becoming clear the current pace was unsustainable. However, very few were able to correctly foresee the scope of the nationwide collapse of new home construction.
We all know what came next. The conventional wisdom flew out the window and by fall of 2008 the great recession was on. The U.S. stock market went to 6,000. Lehman Brothers, the fourth largest financial institution in the U.S., was gone. The banking industry was on the brink of collapse, and the U.S. new home construction sector went from the fast lane to the ditch. The thing that really stands out is the speed and the sharpness of the decline. High highs and low lows.
Q: What did the numbers look like from the peak to the trough?
A: Well, the new home starts peaked at around 1.7 million in 2006, and by 2009 we hit the bottom with starts of less than 400,000.
Q: How did flooring contractors, like FloorExpo members, handle this unprecedented pull back?
A: With toughness, determination and a tremendous amount of hard work. The fact that so many contractors in our segment weathered this storm is a testament to the toughness and the business acumen of the leaders of these companies. To simply survive, these leaders had to react decisively and quickly to the new circumstances. They did just that, and that is why they are enjoying the improved business conditions we are seeing this year.
Q: Let’s talk about current conditions in the builder segment. It has been a good year, right?
A: Yes, it has, the best since 2008. I would describe the last couple of years nationally as a slow, tough climb out of a deep hole. Certain markets, of course, have been faster to improve than others. But in general it has been a slow, uneven improvement, and 2013 is really the first year that has held steady throughout the whole year. In 2010, 2011 and 2012, we had decent months, particularly during the spring selling seasons, only to experience a slowdown later in the year.
So, this year there is significant cause for optimism. In fact, the NAHB Housing Market Index, which tracks builder confidence, went above 50%, into the optimistic zone, for the first time in seven years this June, indicating that builders in general feel more optimistic than pessimistic these days. We share that feeling.
Q: So how does the builder market differ today from five years ago?
A: From a numbers standpoint, and this is interesting given what we have been talking about, it’s very similar. Starts and sales in 2013 are quite close to the numbers we had in 2008. What is different, of course, is how we feel about those numbers. In 2008, we were heading into the hole, and today we are climbing out. Some things that are different are mortgage rates and foreclosures. In 2008, mortgage rates were in the 6% range. Today, they are around 4%. Money is cheap. Foreclosures are also way down; in 2008 we had over one million, and today it is down to less than 500,000. And, importantly, new home inventory is down significantly—350,000 in 2008 versus 195,000 today. This equates to ten months of inventory versus five months. Cheap money, low mortgage rates, improving jobs picture and an improving economy are the main reasons for the optimism I’ve discussed. And it certainly doesn’t hurt that the stock market is doing well, with the Dow Jones at 16,000.
Q: So, why did the single-family builder market seem to cool slightly this fall?
A: Yes, we have seen a slight cooling in just the last two months and that has caused a more cautious outlook for 2014. The reason for that seems to be a slight increase in mortgage rates and the fairly dramatic increase in home prices. Home prices are up 13% year over year nationally and in some markets up significantly more than that. For instance, Las Vegas and California are up over 25%.
Demand is still below what we expect to see historically, so we view this as just another bump in the road on this steady but choppy recovery.
Q: Can you give us an update on the floorcovering trends in the builder segment?
A: The biggest overall trend is the continued growth of hard surface versus soft surface. It looks like hard surface will exceed 50% of the total industry for the first time in 2014. The percentage of standard versus upgraded product continues to be lower than we like to see, but that is starting to change. LVT, which has been the single largest growing category in overall flooring, is beginning to make inroads into builder. We expect this momentum to continue in 2014.
That said, the workhorse product categories of carpet, hardwood and tile will continue to lead in this segment. But it will be interesting to see where LVT is in three to five years.
Q: So, what is the outlook for the builder market for the next several years?
A: Well, as I mentioned, we are very optimistic. Mortgages are cheap, the economy is improving, and unemployment is down to the 7% range. The other big thing is that household formations lagged during the downturn, creating a gap of pent up demand. That gap could be as large as 1.75 million. Even if it is a fraction of that, there are folks out there still looking to achieve the American dream of home ownership. Although we believe the recovery will be uneven in nature, we believe it is here to stay. Let me add that the FloorExpo members are very bullish on the future.
Being a serious player in the builder segment requires quality service, craftsmanship and skilled labor. It requires tremendous organization in getting the orders in and installed on an extremely tight timeline. It must be done right every time, never missing a closing. These things are not easy, but our members are very good at it.
Q: Any final thoughts?
A: Yes, perseverance, toughness, and determination pay off. We are excited to have a great 2014.
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