Single-Family Builder Update: With the market still soft, homebuilders are employing a range of strategies to keep business moving – April 2024

By Darius Helm

Based on a range of indicators and market conditions, industry experts anticipate that the single-family housing market will strengthen as the year goes on. High mortgage rates continue to suppress turnover despite pent-up demand for single-family homes. The market is poised to recover in 2025, and in the meantime, homebuilders have developed incentives to draw in buyers and strategies to keep costs in check in order to make it through this slowdown.

2023 RESULTS
New-home sales peaked in 2021 and eased off in 2022, ending the year down, with the decline deepening in 2023. However, the second half of 2023 showed improvement in sales, both monthly and year over year, boosted by pent-up demand and traction from homebuilder incentives. Mortgage rates continued to climb in 2023, peaking above 7% in October of 2023 before starting to moderate.

According to CoreLogic public records data, the strongest metro markets were in the southern half of the country, led by Dallas/Fort Worth and Houston, followed by Phoenix and San Antonio, with Austin in fifth, though now showing signs of cooling. Among the weakest was the New York City metro market. The Atlanta and Tampa metro markets were also down, both by double digits.

In a FloorDaily podcast last month, Connor Lokar, senior forecaster at ITR Economics, said, “If you were down 13%, you were down with the market.”

Doug Kenney, divisional vice president at Shaw Industries, reports, “Toward the end of 2023, many major builders decreased their forecasts, but the good news is that at least they’re hitting those lower forecasts.” He notes that spec building was down last year due to both interest rates and affordability, with mid-range homes driving the market, adding that investment in single-family rentals remained robust.

In general, residential flooring contractors targeting the middle to higher end of the market have fared better than most. Craig Phillips, president of Ohio-headquartered The Flooring Edge, expected custom and “affordable custom” homes would be down significantly in 2023, but, in the end, they fell less than 5%, in part because of a backlog of business. However, with the backlog fulfilled, 2024 started off with bigger declines. And Matt Routzon, COO of Colorado’s Guy’s Floor Service, focused mostly on mid-level custom and semi-custom homes, reports that business slowed in the second half of last year. In his region, which is centered on the Denver metro market, mid-level has outperformed entry-level.

Bob Burton, president of Southwestern Interiors, reports that the Dallas/Fort Worth market, where his business is focused, performed well, thanks in part to an influx in residents of about 150,000 in 2023, while Austin, an overheated market three hours away, has seen its fortunes fade.

FLOORING OVERVIEW
The single-family builder segment makes up about 17% of the residential flooring market in square footage, according to Market Insights, accounting for about 2.1 billion square feet last year. The general trend in flooring use in single-family homes has been away from carpet to hard surface, and within hard surface, from hardwood to SPC.

Carpet used to have a dominant position in the residential market, but it has been steadily eroding for more than three decades now. According to Burton’s annual analysis, carpet makes up about 13% of installed dollars in the single-family market and a lot more in square footage. He adds that carpet has lost more share in multifamily than in single-family homes.

Burton also notes, as do many other residential contractors, that carpet has stopped losing share, explaining that he hasn’t seen share losses in carpet over the last three years. Most agree that it’s almost entirely absent on the main floor but still has a strong position in bedrooms and a smaller share of finished basements. Bill Hamad, co-owner of Touch of Color, which does most of its business in Pennsylvania and surrounding states, contends that carpet hit bottom a year or two ago, and he sees it going back up, noting that it’s still cheaper than SPC, even when including installation. And Phillips, who generates the bulk of his business in northern Ohio but also does work in states like Pennsylvania, Michigan and Virginia, also reports that carpet has stabilized in terms of marketshare.

However, Routzon reports that in his middle to higher-end market in Colorado, he sees carpet still losing some share. He adds that while it’s most common at the lower end of the market due to cost, even there it’s still losing ground to rigid LVT.

While most of the market is in PET these days, Phillips’ focus going back 15 years has been on Mohawk’s SmartStrand (triexta) products. He’ll also do higher-end carpet from producers like Stanton, Milliken and The Dixie Group’s Masland. Patterned and woven carpet is fairly common at Barrington, along with area rugs.

“No one asks what the fiber is anymore,” says Burton, who has focused on branded nylon for much of his career, including a 14-year stint working for Tuftex (now Anderson Tuftex, part of Shaw Industries), noting that these days all that people care about is color and feel. He adds that advancements in PET, from twist to solution-dyeing, have helped PET close the performance gap with nylon.

Shaw, Mohawk and Engineered Floors are the dominant carpet producers in the single-family market, and most of what they make is PET, and some also point to Mannington’s Phenix as a good manufacturing partner. One contractor noted that, while his firm does most of its business with the big three mills, one of the advantages of working with smaller manufacturers is they’re less prone to shoulder past him to get to the end user. Another adds that they tend to get more in terms of innovation, style and design from the small and medium firms.

On the hard surface side, the main development over the last several years has been SPC gaining, particularly at the lower end, pushing out mostly hardwood flooring. However, in the middle and higher end of the housing market, hardwood continues to have a strong position. And reports of SPC failures have helped other hard surface categories regain some lost ground. Burton, for instance, says that over the last few months, he’s been selling more gluedown hardwood and laminate and less SPC. Routzon says that at the custom level, hardwood is the most popular hard surface.

Burton believes that SPC, which by some estimates accounts for as much as 80% of the single-family market, has been oversold in terms of what it can and cannot do. He’s not convinced it’s a great product for new construction, adding, “New construction is the wrong market to test out a product.” He reports that performance issues and product failures are clustered at the low end largely because of the thinness of the products. These products are made to expand and contract, so, if a section of an installation is pinned down, say, by a heavy object or a baseboard, expansion and contraction can put pressure on the attachments between boards, and if those boards are too thin, they can’t withstand the pressure. Peaks and valleys start to propagate across the installation, and the flooring ultimately has to be replaced.

Some contractors also report that entry-level SPCs can suffer from moisture problems and discoloration.

Burton says that some builders are gluing down SPC to avoid these issues. And he notes that these SPC failures have led to a degree of comeback for hardwood, adding that because some of hardwood’s pricing issues were related to freight and container costs and component availability, which have since normalized, “we’re seeing some well-priced woods these days.”

While some of the residential contractors Floor Focus spoke with contend that laminate has no place in their markets-and in fact, laminate has never had a strong position in the builder market-here and there it’s making gains. Burton reports that he’s seeing more laminates, led by Mohawk’s RevWood, though hardwoods are in higher demand. He cites Cali Floors’ Barrel collection of engineered white oak as a trending product in his market.

BUILDER STRATEGIES
With high interest rates as the biggest barrier to single-family home sales, some of the larger homebuilding firms have figured out ways to offer more attractive terms. “Builders with the financial wherewithal can buy down the rate,” says Burton. This effort is largely focused on the entry-level to mid-level homes, with builders offering rates a point or two lower than the typical mortgage. A lot of builders started offering these terms in the spring of 2023.

Routzon says, “In terms of interest rate buydowns, folks like Lennar are leading the way, but anyone who can afford financing it is doing it.”

In the middle to higher end, design center incentives are more common, like $20K or more in design center credit to upgrade flooring options and other interior elements.

Kenney reports that some builders have been streamlining and shrinking their product portfolios, even at the higher end. And Routzon says that one of his builders recently changed its model to all packages and spec building, and now Guy’s is doing more spec projects, but without a clear sense of how the completed homes are selling on the back end.

All of the residential contractors report that they’re seeing smaller homes. The trend is not driven by demand; rather, it is to reduce building and material costs to help keep their operations healthy and profitable. And some builders are also shifting to more affordable flooring.

Burton says, “Home prices have leveled out because builders are trying to build homes that are a little smaller, trying to take advantage of some stabilization in material pricing. But costs are not coming down because land development and financing are not coming down.” He adds that larger builders are leading the way, and a lot of it is at the lower end of the market, with homes shrinking, for instance, from 2,200 square feet to 1,800 square feet. And Routzon says that one of his larger customers, Richmond American Homes, has moved to its Seasons collection of smaller homes.

2024 AND BEYOND
Most market data points to a recovering single-family housing market. New-home sales have been creeping up for months. February new-home sales, while down 0.3% from January, were up 5.9% year over year. February single-family housing starts were up 11.6% from January and up by mid-single digits year over year, and privately owned housing completions were up 19.7% from January and 9.6% year over year. And single-family permits also grew in February, though at a more modest 1.0% rate.

Also, builder confidence is improving. According to the National Association of Home Builders /Wells Fargo Housing Market Index, builder confidence in the market for new single-family homes went up for the fourth consecutive month in March, climbing three points to 51 and crossing into positive territory for the first time since July 2023.

Industry experts agree that the U.S. housing market is fundamentally robust because of the demand for housing-Realtor.com reports single-family new home construction is lagging behind household formation to the tune of 7.2 million homes, with about 4.7 million of those households currently stuck in the rental market.

Also strengthening the market is pent-up demand. Burton reports that year-to-date, his business is up by mid-single digits, and he theorizes that some people may have grown weary of waiting for rates to come down and decided it was time to get off the fence.

Holding back the market is the fact that mortgage rates are still hovering just below 7%, and the Fed has not yet acted to lower its key interest rate, though rate cuts are expected later this year. Also, it’s an election year, and a fraught one at that, and many people tend to spend cautiously during these volatile cycles. But while it’s still unclear how much the market will strengthen in the second half of 2024, the consensus is that all signs point to healthy growth in 2025.

Copyright 2024 Floor Focus

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