An intelligent analysis of 2013 forecasts for the hardware and building material industries must begin with the recognition of a term that has entered the lexicon of economic forecasting and business predicting.
The term is "head fake."
Referring to economic indicators that point in the wrong direction, or a forecast that misses its mark, the forward-looking head fake has been a fact of life for the home improvement and building material industry in recent years. In the spirit of full disclosure, HCN has facilitated several of these head fakes, including our own headline from a 2007 article anticipating "A Soft Landing" for the housing market, which at the time was experiencing a slight dip.
While hindsight is 20-20, the industry now looks ahead with the principle of "regression to the mean," lifting metrics that have been stuck near record lows. The million-housing-starts mark is almost within reach, and warnings about material scarcity for a growing demand sound increasingly urgent.
Against this backdrop, HCN offers the following pages of forecasts from those who are paid to know best. One of the forecasters is NAHB chief economist David Crowe, who described the challenges facing those who look into the future: "If I'm right, nobody will remember. But if I'm wrong, everybody will remember."
Either way,HCNwill remember, because we have the forecasts written down. We begin with starts.
2013 Forecast: 940,000
"If you haven't already seen it, the builders are feeling better," said Crowe, during a presentation at the International Builders' Show.
But aren't these guys at the NAHB the eternal optimists? Hold that thought. In late 2011, the NAHB's 2012 forecast called for 709,000 housing starts for 2012. They were actually 10% under the actual full-year figure of 780,000 as reported in January 2013 by the U.S. Census Bureau.
The NAHB forecast for 2013 is a 21.5% increase to 940,000 starts. Single-family starts are expected to increase 22% to 535,000.
The NAHB's optimism is supported by its homegrown metric known as the Improving Markets Index. The association defines an "improving market" as one that shows growth for at least six months in all three of the following: single-family building permits, home prices and employment. By the NAHB's tally, there were 12 markets that made the list when the measurement was introduced in September 2011. In January 2013, there were 242 markets.
"Nearly every measure of housing market strength — sales, starts, prices, permits and builder confidence — has been trending upward in recent months, and we expect to see gradual but steady growth along these lines in 2013," Crowe said.
But before you bet the house on a 20% increase, there are some wild cards to consider. Crowe and others point to tight mortgage lending conditions, inaccurate appraisals, rising materials prices and a declining inventory of buildable lots as challenges to growth. And that's not counting unforeseen roadblocks on the federal policy front, among them being possible changes to the mortgage interest deduction.
Builder pain points
2013 Forecast: building material prices
Source: Builders surveyed by NAHB
Looking into 2013, this year's No. 1 concern among builders is "building material prices."
That's a big change from the previous year's NAHB builder survey, when "building material prices" ranked ninth, and the No. 1 problem was "concern about employment/ economic situation."
What will keep builders awake at night? Continuing down the list of anticipated problems for 2013, builders cite: gridlock in Washington, D.C.; concern about economic situation; regulation of banks; inaccurate appraisals; difficulty qualifying buyers for mortgages; attempts to limit the mortgage interest deduction; and bringing up the rear, cost/availability of labor.
2013 Forecast: 8.1% growth
Source: Portland Cement Association
Improving underlying economic fundamentals, the existence of large pent-up demand balances, and the diminishment of economic fiscal cliff uncertainty will combine to result in strong growth rates in 2013 and an increase in cement consumption, according to the Portland Cement Association (PCA).
The group forecasts an 8.1% growth in cement consumption in 2013, significantly higher than the tepid growth projected in its fall 2012 report. The upward revisions reflect adjustments made in light of the recent fiscal cliff accord, recognition of stronger economic momentum and markedly more optimistic assessments regarding residential construction activity. The January report marked 2012 consumption at 78.5 million metric tons, an 8.9% gain compared with 2011.
"Growth in 2013 cement consumption will be largely driven by gains in residential construction," PCA chief economist Ed Sullivan said. "Housing starts should reach nearly 950,000 units, with single-family construction near 700,000 starts during 2013. We see starts hitting the 1 million mark in 2014 or 2015."
Sullivan did caution, however, that the first quarter of 2013 would actually show declines compared with the same period in 2012. "It is important to point out that this potential decline in first-quarter growth rates does not signal a weakening in market fundamentals, but rather a hangover from favorable 2012 weather conditions. Stronger gains in cement consumption growth are expected during the second quarter."
The accelerated consumption predicted during the second half of 2013 should carry into the following year. PCA projects an increase of 8.3% for 2014.
2013 Forecast: 2%-3% increase
Source: Freddie Mac
Nationwide, home prices are expected to rise 2% to 3% in 2013, according to Frank Nothaft, chief economist at Freddie Mac.
Home prices are on something of a roll. The median sales price of new houses sold in December 2012 was $248,900, up from $245,600 in November, according to the U.S. Census Bureau. The average sales price was $304,000, up from $289,900 in November.
Home price stats can be misleading. At the peak, a $300,000 house that lost 66% of its value falls to $100,000. The same house that gains 20%, will sell for $120,000.
Factoring into those sales will be historically low mortgage rates that Nothaft said they will stay below 4% through the end of the year for a 30-year, fixed rate loan.
2013 Forecast: down 0 cents to 20 cents per gallon
Source: U.S. Department of Energy
Gas prices in 2012 were at an all-time high annual average — $3.60 a gallon of regular, according to the American Automobile Association (AAA). In 2013, look for the average price to fall by approximately 18 cents per gallon, according to the U.S. Energy Information Administration in the January 2013 edition of its "Short Term Energy Outlook," with a chance to drop maybe 20 cents given new investments in U.S. crude oil production.
According to the U.S. Energy Information Administration, due to new pipeline projects coming online early in 2013, new sources of lower-priced crude oil produced from tight oil formations in the middle of the United States are becoming increasingly available to refineries along the Gulf Coast. Therefore, expectations are for retail gas prices to dip almost 20 cents compared with 2012.
The latest triple numbers from AAA put gas at $3.33 per gallon.
2013 Forecast: up 3.4%
Source: National Retail Federation
Not counting automobiles, gas stations and restaurants, the National Retail Federation predicts 3.4% growth for store sales in 2013. But the association's president isn't celebrating.
That's because the pace of growth is expected to slow from last year's 4.2% figure.
"Consumers read troubling economic headlines every day and look at their bottom lines at the end of the month, and they don't like what they see," said NRF president and CEO Matthew Shay.
2013 Forecast: up 9.0% to 12.0%
Lowe's is plowing ahead with Mylowes and its seamless multi-channel vision.Amazon.comis recognized increasingly as a challenge to home improvement retailers everywhere. And Do it Best has pledged to become world class in the digital arena.
Sometimes it seems the world is going digital.Shop.org, the digital division of NRF has forecast a 9.0% to 12.0% increase in online sales in 2013. Momentum for growth was established during the 2012 holiday shopping season, which showed an 11.1% gain over the previous year's digital sales, according toShop.org.
2013 Forecast: double-digit growth
The Joint Center for Housing Studies at Harvard University uses the businessman's favorite four-word phrases to describe remodeling in 2013: "accelerating double-digit growth."
Sounding a note of cautious optimism is Kermit Baker, the director of the Remodeling Futures Program at the Joint Center. "There are many external economic and political risks that could derail this remodeling recovery," he said. "However, the solid momentum behind home-building activity, existing-home sales, low financing costs and remodeling contractor sentiment all point to a solid start to the new year for home improvement spending."