2007 Forecast: Decline to be short
The residential market
The residential new housing market showed a decline in 2006 for the first time since 2001. Although this decline has been forecasted for the past several years, it was more severe than expected.
Most forecasters expected a decline in single-family housing in the mid- to upper-single digits, but at the current rate a decline of about 14 percent from 1.71 million homes to 1.47 million homes seems likely. The decline in residential housing starts was bolstered by rising interest rates and a glut of new and existing home inventory on the market. The chart below shows that inventory of new housing has nearly doubled since 2000. Additionally, months supply of new homes, a ratio of houses for sale to houses sold, increased to 6.3 months, the highest level since December 1996. Existing home sales are faring even worse, up to an inventory of 3.92 million existing homes available for sale, which represents seven and a half months of supply. That is the highest level since April 1993. As of October 2006, existing home sales also were down by roughly 13 percent year over year.
As a result of this inventory glut, houses are not being built at the same rate they have been in the recent past, and home prices are beginning to come down. The latter happened for the first time since April 1995, as median home prices in August 2006 declined to $225,000, 2.2 percent lower than the median home price in 2005 of $229,000. In the face of rising inventory, these price declines will continue, particularly in the locales that saw the most price appreciation and investment speculation during the past several years.
In this atmosphere the only question that remains for 2007 is how much further will the market decline? In terms of housing starts, another double-digit decline is expected in 2007, as shown by the housing start forecast, top right. Although Ducker has a preliminary expectation that the market will improve in 2008, much of this is dependent on new home inventory and the months-supply ratio. Stakeholders in the residential marketplace should keep a close eye on these metrics throughout 2007.
The cloudiest crystal ball is the other half of the residential glazing market, the replacement and remodeling window market. Although marginal growth is likely in this market during the next year, it will not be enough to offset the impact of the declining new home market. Some of the same metrics that are negatively impacting the new home market also will have an effect on the replacement market. Rising interest rates and declining home prices will continue to result in declining home equity loan activity used to finance remodeling projects. A consequence of slower existing home sales might also be a decrease in remodeling spending as many home buyers invest in new windows and doors, or other projects shortly after purchasing a home. On the other hand, homeowners might instead choose to upgrade their current homes instead of buying houses on the market, which would be beneficial to the replacement window market.
The automotive market
The automotive market, which accounts for roughly 25 percent of the total primary glass demand, also is expected to flounder in the next several years. Although North American Free Trade Agreement region automotive production has been relatively static during the past decade, glass usage has been bolstered slightly in the recent years by truck and SUV sales. These big “gas-guzzlers” are also “glass-guzzlers” that use upward of 40 percent more glass per vehicle than other cars and sedans.
North American automotive demand is expected to be flat to declining for the remainder of 2006 and 2007. In 2005, 16.3 million units were produced; 15.8 million units are anticipated in 2006. The production for 2007 is forecast at 16.1 million units. The split between car and truck production, about 40 percent to 60 percent, is expected to remain constant throughout the next several years as consumers switch to more fuel efficient SUVs, crossover vehicles and cars. Glass demand in automotive will decline slightly during the next several years.
The nonresidential market
The silver lining in the glass markets during the next several years will be the nonresidential market. While this market has underperformed throughout most of this decade, early indicators and recent performance show a turnaround. Contract awards shown at right, which are measured in terms of millions of square feet of floor area and often lag one year behind actual construction, showed improvement in 2004 and 2005. Although levels still remain significantly below pre-2001 marks, much of the decline occurred in the manufacturing segment, which is a poor category for glazing products. Key glazing segments, such as office and hotel, will continue to lead the turnaround going forward, while other segments that have remained strong in the past two to three years, such as educational and retail, will begin to slow.
Ducker forecasts nonresidential exterior vision area to grow from 463 million square feet in 2005 to 512 million square feet by 2008. Additional growth in this segment also will be driven by value-added products such as tinted and coated glass. Despite growth in this segment during the next two to three years, it will not likely compensate for the decline in the residential market.
Overall glass demand forecast
After several strong years of overall float glass demand, with average growth of 2 percent between 2001 and 2005, the abrupt downturn in residential housing starting in 2006 along with weak automotive demand is projected to result in a short-term decline of about 2 percent in 2006 to be followed by a 1 percent decline in 2007. Modest growth should resume in 2008 and 2009.
Manufacturers will no doubt boost efforts to find export markets to offset weakening domestic demand, particularly for value-added coated and tinted products. On the reverse side, imports have grown in recent years and represent a threat to domestic suppliers, but most imports of glass are still less than 3 percent of overall demand and are mainly from Mexico. Float glass is one product category where the United States is likely to remain a net exporter.