As some experts predicted, the homebuilding bubble finally burst in the second half of 2006, with new-home starts declining precipitously across the United States. The market must sell off an excess supply of homes—a process that will continue at least through the first half of 2007—before construction can regain steam.

“We think the market’s in a correction phase. There’s still an overhang of inventory that needs to be worked off, and we think that will come into balance in the next couple of months,” says Bernard Markstein, director of forecasting for the National Association of Home Builders, Washington, D.C.

The NAHB forecasts 1.6 million housing starts in 2007, a slight improvement from the late-2006 pace but well behind the year as a whole. Contractors built an estimated 1.8 million homes in 2006, down 14 percent from the 2.1 million in 2005. Forecasts call for a modest rebound to 1.8 million starts in 2008.

For appliance makers, it may take even longer to see positive results from improving residential construction. The appliance in­ dustry generally trends behind home-buying activity by five to six months, the length of time it takes from the startup on a home to when appliances are installed.

Despite these cloudy forecasts, appliance makers and their metals suppliers are generally optimistic about the year ahead.

“The industry is not as beholden to new-home starts as it has been,” says Joseph McGuire, president of the Association of Home Appliance Manufacturers, Wash-ing­ ­ ton, D.C. According to industry data, a 6 percent decline in home starts only has a 1 percent impact on appliance sales.

AHAM’s forecast of shipments in 2007 reflects that assertion. The industry trade group projects record shipments of 47.8 million of the six major appliances in 2007, 2.5 percent ahead of the 2006 total. Shipments of the AHAM 6 (washers, dryers, dishwashers, refrigerators, freezers and ranges) are expected to climb even higher in 2008, topping 48.8 million units. For all appliances, AHAM predicts a 1 percent increase in shipments, to a record in excess of 80.7 million units.

Several factors are helping to free the appliance industry from its reliance on new-home starts. Chief among them is the industry itself. Appliance manufacturers have grown increasingly innovative in the past 10 years, says Evan Barrington, vice president of the Stevenson Co., Louisville, Ky.

“It’s a more exciting industry, with a lot of new and improved products,” says Barrington, whose company provides market research and forecasts on consumer goods. “Innovation is one of the reasons we’ve had good growth.

One notable innovation is the front-load washer, an increasingly popular product among consumers. Sales of front-load washers represented 25 percent of the market in 2006, and show no signs of slowing in the coming year.

Poised to become the next hot appliance is the bottom-freezer refrigerator. Michael Hunter, marketing brand director for Amana, which is now part of Whirlpool Corp., says the bottom-freezer refrigerator is the fastest growing appliance today, with sales improving at a 21 percent clip. The freezer at the bottom appeals to consumers, Hunter says, because the average resident uses the refrigerator seven times more often than the freezer. That means less bending to reach items in the bottom regions of the fridge.

Innovative new designs have gone a long way toward improving the perception of appliances among consumers, and boosting demand. “Our data shows that people are more interested in features of appliances—and more interested in them as something they want, not something they need,” McGuire says.

The new view that appliances are luxury items rather than simple commodities is impacting the life cycle of the machines. Eighteen percent of consumers in 2006 decided to upgrade appliances before the old model had worn out, almost twice the total from earlier in the decade. “That’s a trend across all appliances,” McGuire says.

Paul Leuthe, corporate marketing manager for Sub-Zero Freezer Co., Madison, Wis., says the decision to upgrade appliances is often motivated by economics. “People have decided to put money into the home where it’s not going to lose value,” he says. “And more often than not when they do that, they look at the kitchen.”

Outside the desire to own the latest and greatest or the decision to enhance their homes, other appliance buyers are motivated by concerns over energy and the environment. The high costs of energy, coupled with growing interest in global warming and water conservation, have prompted some homeowners to replace older, less efficient appliances earlier than in the past. “We’ve seen consumers opting much more to upgrade their appliances because of energy efficiency,” says McGuire.

Shipments of Energy Star clothes washers, for example, have increased from 14 percent in 2002 to 38 percent in 2006. Energy Star appliances (those that meet guidelines of the U.S. EPA and Department of Energy) are at least 15 percent more efficient than the industry’s ­ minimum-stan­ ­ dard model.

And it’s not just consumers taking notice. One crucial issue facing AHAM is California’s attempts to require water standards on clothes washers that are tougher than the federal requirements. The Department of Energy rejected the claim on the grounds that the state hadn’t proved it had unique needs, though McGuire says it highlights the necessity for clarity at the federal level. The current standards were enacted in the late 1980s, before some of the latest appliances had even been introduced.

Uniform national standards that are cost-benefit justified are both good for the consumer and the manufacturers, McGuire believes.

“What’s happened in the last five to eight years is that the standards provide the floor. But we’ve seen manufacturers, through innovation, technology and working with the utility incentive programs, offer products that go way beyond the federal standards,” McGuire says. “For consumers who are really interested in going beyond [the minimum] and are willing to pay for it, there are the options. We’ve seen more energy savings through a combination of mandatory standards and market incentives.”

While some consumer trends have a short shelf life, appliance buyers’ fascination with stainless steel finishes appears to be more than a simple fad. “There are no signs that people are tiring of it,” Barrington says.

Indeed, AHAM data confirms that stainless steel’s use in bottom-freezer refrigerators, single-burner ovens and double-burner ovens was up over 20 percent in 2006.

In some cases, stainless steel’s appeal is enough to transcend price. Despite the nickel surcharge rising to more than $16 per pound in February, pushing it above the base price of the metal, stainless remains a popular choice among appliance makers, though pressure to contain costs and keep consumer prices low remains intense.

“Designers who specify our product in kitchens like that look. They think that’s what a true functioning professional kitchen looks like,” says Leuthe at Sub-Zero Freezer.

Rising material costs have not hurt demand at ThyssenKrupp’s Mexinox mill in San Luis Potosi, Mexico, which is focused on producing stainless steel for the appliance industry. “The appliance sector is still going strong. It’s not going to be gangbusters like last year, but we expect it to be decent,” says Katie Benchina, marketing manager at ThyssenKrupp Mexinox USA.

One way manufacturers have gotten around the high price of stainless is through substitution with lesser grades. The 304 series, with its volatile price, is often replaced by lower-nickel austenitic grades such as type 201 or the most cost-effective, the ferritic 430 series.

“We’ve been working for four years on promotion of substitution. With nickel prices high, we’re offering alternatives,” says Benchina. “One of the niches that TK Mexinox focuses on is the ferritics, namely 430 with a rolled-on finish.”

Benchina says one major appliance manufacturer has moved most of its stainless steel refrigerators to 430.

John Zemon, stainless steel products manager for Atlas Steel Products Co., Twinsburg, Ohio, says other manufacturers are interested in following suit.

“We see that as a trend, and it has accelerated over the last year,” Zemon says. “Manufacturers’ purchasing people are saying, ‘You’ve got to get us out of this material.’”

Atlas, which distributes the entire series of stainless materials, will work with manufacturers who opt for the ferritic grades. “You can’t bury your head in the sand and say you’re only going to sell 304,” Zemon says. “We have to be aware there are corrosion-resistant 400 series grades, and take our customer down that path so we can stay with them as long as possible.”

The shift in attitude among some consumers, who now consider appliances less long-term and more readily replaceable purchases, makes the downgrading of materials more reasonable, Zemon adds. “I hate to say we’re a disposable society, but we are. The durability and life cycle of appliances will probably be five to 10 years instead of 25 to 30. You just put it on the curb and get another one.”

Benchina says her company has also seen an interest from appliance manufacturers in exploring different thicknesses of materials, contemplating downgauging from the traditional 22 gauge used in panel applications. “I don’t think they’re looking to sacrifice quality,” she says. “They’re pursuing every option to take advantage of savings on purchases of stainless steel.”

Service centers have one concern that stands apart from the overall demand for appliances. Manufacturers buy much of their metal for exterior panels mill-direct, while the service center industry more often supplies metals for component parts. As is the case in many industries, component-part makers are shifting operations overseas.

“There has been offshore sourcing for those kinds of components. Burners and things that were made in the States have now gone to China or India,” Zemon says. “Once the Whirlpools and the Maytags find that they can make the part over there, they’re not bringing it back here.”

Zemon points to barbecue grills as an example. Components for barbecue grills were once a big part of the business but are non-entities today, having moved entirely offshore.

“If we looked at our customer base five years ago and looked at it today, it’s absolutely different,” he says. “As service centers, we have to be aware of these trends.”