Strategic Exchange: Uptick in housing turnover delayed – March 2024

By Kemp Harr

The headline for this column last month said “Mortgage rates to drop soon.” Now, a month later, recent inflation data has pushed the likelihood of the Fed lowering interest rates to later in the year.

There are two primary factors driving that delay. February’s inflation number (CPI) was 3%, a point higher than the Fed’s goal, and employment numbers rose by 353,000 in January, keeping the unemployment rate at 3.7% for the third month in a row. For those that seek to buy a home, it’s now become a reality that a 30-year fixed mortgage is going to cost 6.5%, at least until the back half of the year.

Despite this high cost of borrowing, it was encouraging to see that existing-home sales rose to 3.1% in January, and new home sales rose 1.5% over December and were up 1.8% on a year-over-year (YOY) basis. In some cases, timing factors like household formation (marriage), downsizing (retirement) or death are pushing people to move, rather than wait around for lower rates. Today’s housing inventory, totaling around one million homes, is rising-giving buyers more time to find what they are looking for and perhaps negotiate for a lower purchase price.

Speaking of home prices, inflated shelter costs is another debilitating factor in housing turnover, and it’s not expected to subside anytime soon. Case-Shiller’s most recent report showed home values rose 5.5% in December, and the median home sale price was $382,000-up 4.4% from a year ago.

One bright spot in the news recently is that consumer sentiment continues to improve-up 0.8% in early February but up 19% on a YOY basis. Consumers are more likely to open their wallets and spend money on their home if they feel the economy is headed in the right direction. Many believe that we’ve weathered the worst part of the post-Covid dip in economic activity brought on by the highest interest rates in 20 years.

At this point, it’s not a question of if the housing market will re-ignite, it’s just a question of when. And many of us in the flooring market are hoping it will be this year.

While we’re on the topic of the economy, it was discouraging to see that the American Institute of Architect’s (AIA) billing index for January was 46.2, down from 46.5 in December, and it’s been below 50 since October of last year. This index is a leading indicator that foretells the level of construction activity we can expect to see in the commercial market this time next year. So, as the residential market starts to recover, there is a strong likelihood that we will see a dip in demand on the commercial side in 2025.

JANUARY MARKETS WERE SOFT
In this issue, we recap the January markets, where attendance was a mixed bag. One can hardly blame retailers for staying close to home following a year where revenue was off, in many cases, by low double digits. Naturally, performance among retailers on a national basis varies depending on geography, competitive landscape and marketing efforts, but the larger suppliers are telling us that wholesale flooring sales within the residential market continued to be soft into the first couple of months of this year.

FLOOR & DÉCOR PERFORMANCE
In Floor & Décor’s (FND) recent 2023 year-end report, the firm reported sales of $4.4 billion-up 3.5% from 2022-with 31 new stores opened in 2023. Comp store sales were down 7.1% in 2023 but down 9.4% in Q4 and down 13% for first two months of 2024. Customers are buying, but the size of the projects they are working on is smaller. Pro sales in 2023 expanded to 45% from 42% the prior year. Much of the share-take has to be coming from the home centers due to the fact the price point and product mix is similar, and the target customers align-pro and DIY.

Based on the numbers we see, the 1% share-take that FND is touting is not coming from the more organized specialty retailers like CCA Global and the National Floorcovering Alliance (NFA). FND’s long term goal is 500 stores, and its count at the end of the year was 221. One third of new retail locations added in 2024 will be a smaller format store that measures 45,000 square feet versus the current average of 77,000 square feet.

Where FND is sourcing products from continues to evolve. In 2018, 50% of its products came from China, but in 2023, that number dropped to 25%. Most of the product sourced from China is LVT. Even more interesting, U.S.-produced material now represents 23% of sales and will most likely surpass China next year.

The shift in flooring sales by category is also interesting. Hardwood flooring showed the strongest growth-up 6.1% YOY-with tile up 0.5% YOY. Sales declined in natural stone by 6.0%. and laminate/LVP was down 7.3% YOY.

INTERFACE YEAR-END RESULTS
While Interface’s annual sales dipped 2.8% to $1.26 billion in 2023, it was encouraging to see that the company is healthy, with an increase in profit margin and reduction of debt. Net income for the year was up 127% to $44.5 million.

The vertical sectors performing the best for Interface are education (up 5%) and corporate office (flat for the year but up 4% in Q4). I met with CEO Laurel Hurd in early February and was encouraged to hear more about Interface’s plans to make more healthy changes in the coming year. Stay tuned.

If you have any comments about this month’s column, you can email me at kemp@floorfocus.com.

Copyright 2024 Floor Focus

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