The state of the 2020 building materials industry contains some interesting data. For example, housing starts are flat in the U.S., and remodeling is a bright spot expected to ebb. The state of the 2020 building materials industry shows a slowing global economy coupled with tariffs are cautioning building materials manufacturers and creating uncertainty despite a still-healthy employment, wages growth, and home values that continue to increase.
North America should exercise caution ahead!
Can U.S. consumers be expected to continue buying homes and make necessary repairs and remodeling at the same rate in 2020 despite employment and wage growth if it’s in penurious shape?
Tariffs are the big wildcard for 2020
New tariffs could end the building materials recovery while they remain as an unknown quantity. Companies are expected to conserve cash and reduce leverage, being cautious when it comes to increasing acquisitions leverage or share repurchases in 2020.
Many companies were able to counterbalance tariff effects (though trailing) by using lower prices and commodity costs in 2019. But it will be difficult to offset any new or increased tariffs amid an ebbing demand, and any further relief from commodity prices in 2020 is unexpected.
New Construction Expectations / Challenges
Challenging sales growth and its margins are flat housing starts and a shift toward entry-level homes. We can expect marginal sales growth from new homes, mostly on price, not volume, thanks to the housing cycle potentially having peaked.
Having builders focus primarily on entry-level, new home materials will be reduced, and there will be fewer premium products installed, which means narrower margins for building materials companies. renovations and remodeling spending has been robust over the course of the past two years, but growth is expected to slow, though it is expected to stay on the slightly positive side.
Because millennials have shifted their spending habits toward mid-priced choices as opposed to premium building products, some issuers have observed a “mixed-down” effect when it comes to consumers.
Private commercial construction has remained healthy and generally lags residential trends by 18-24 months with commercial property development following new residential communities. Based on this information, the modestly positive trend in commercial construction still has some potential.
Unlike the Great Recession, today’s housing is not in oversupply. Availability is limited as the demand for new homes surpasses supply. Even with the affordability issue, any downturn in housing deliveries in response to a recession will be short-lived because remaining new and existing homes for sale will be absorbed relatively quickly. Even at a reduced rate, household information will create the need to build new homes.
In summation, even though there are cautions, the building materials market is in an upswing in 2020, though it’s vulnerable to change due to unforeseen factors such as the 2020 election, trade agreements, the Coronavirus, etc. But this should not dissuade one from looking into and investing in the building materials market, as there are always unanticipated factors that may arise.