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6-2011 Construction Market Outlook
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Recovery Proceeds Slowly with Little Help from Housing

By Dan Markham, Senior Editor

Metals Industry Pushes Greater Use of Steel in New Home Construction

While most of the home construction market affects the steel industry in an indirect way—through the employment of steel-intensive heavy equipment or as a driver of the sale of home appliances—metals have become more prominent in the structures themselves.

Since 1998, the American Iron and Steel Institute and its Steel Framing Alliance have been promoting the use of cold-formed steel as an alternative to wood and concrete. Progress has been made on the framing side, though the recession makes it difficult to hold on to any market share gains.

“As long as we’re not building anything, it’s tough to compete,” says Robert Wills, vice president of the American Iron and Steel Institute’s Construction Market Development program. “There’s a lot of capacity in the wood industry.”

In fact, the downturn throughout the construction industry has prompted wood proponents to seek more market share where steel is the dominant material, the nonresidential sector.

But steel continues to advocate for gains in the homebuilding market, noting its environmental attributes and strength in the event of catastrophe. Steel brings added stability to a structure and gives occupants the best opportunity to survive dangerous weather events, the types of which have been all too plentiful around the world in recent months, Wills says. 

While the steel industry tries to gain traction in the home’s infrastructure, substantial gains have already been made up top. The Metal Roofing Alliance has been pushing metal as an economical and environmental substitute for asphalt shingles or other roofing products for more than a decade, and its efforts have paid off. 

Bill Hippard, president of the Belfair, Wash.-based MRA and vice president of sales for Precoat Metals in St. Louis, says growth in metal roofing installation has been significant. Once only 3 percent of sales, metal roofing has grown to claim up to 10 percent of the roofing market—a lucrative shift. Hippard says every 1 percent market share gain for metal roofing consumes more than 100,000 tons of steel.

The MRA focuses on the reroofing market for a simple reason—it’s a far larger one than new construction. An estimated seven million homes in America need to be reroofed annually, compared to only 600,000 new home starts expected this year. It also helps that existing homeowners looking to replace aging shingles may be more inclined to consider the long-term cost benefits of a metal roof.

“There’s a one-time upcharge for metal, but when you’re looking at lifecycle costs, you have to replace an asphalt roof two to three times in the life of a metal roof,” says Steve Levitch, vice president of sales and marketing for Metal Sales in Louisville, Ky.

Metal roofing’s growing appeal is attributable to a number of developments both inside and outside the industry. The material’s environmental advantages—its recycled content and future recyclability—as well as its compatibility with solar panels make it a suitable choice for the green homeowner. Further enhancing its attractiveness is the significant advancements in painting technologies in recent years. Metal roofing is now available in just about every color and in styles that resemble everything from Spanish clay to cedar shake. Additionally, some paints have solar reflectants that can help lower cooling costs in the summer.

“I give a lot of credit to the paint companies and the coil coating lines as they’ve come up with a lot of creative paint systems. You can do a lot more with metal that gives customers a very finished look on their projects,” Levitch says.

Besides the roofing panels, Metal Sales also distributes other residential exterior products that are gaining traction, such as soffits, metal siding products, and window and door frames. “Metal has been huge in the structures of buildings, but now it’s becoming more prevalent on the envelope,” he adds.


Nonresidential Market Still Disappoints

Nonresidential construction has not been down as long as home building, but it has sunk just as deep. Major suppliers to the commercial construction industry are hopeful that, at the very least, the free-fall has stopped.

“While nonresidential construction activity remains weak, the bottom in that important market appears to be behind us,” Nucor President and COO John Ferriola told investors during a recent conference call.

The outlook is the same at Steel Dynamics, another major mill supplier to the nonresidential construction market. “In the years 2013 and 2014, a lot better picture emerges for a wide variety of reasons, but right now the nonresidential market is still fairly weak,” said Chairman and CEO Keith Busse, who estimates the market is off more than 50 percent from its high.

On the service center side, companies such as Brown-Strauss Steel and McNichols Company report similar tales of depressed demand. Dave Brenneman, general manager of Tampa, Fla.-based McNichols, says its commercial construction business has been flat and is expected to stay there “until business leaders can feel positive that our current market growth is sustainable.” Most of the company’s current nonresidential projects involve retrofit and remodeling, not new construction.

Mark Engle, executive vice president of the Metal Construction Association, Glenview, Ill., says that while members have not seen any meaningful recovery in commercial construction, “there’s not the alarm bells and general uncertainty there was a year ago. The general move is positive, though we’d like to see it a couple of notches higher.”

Engle’s assessment is supported by the numbers, according to John Cross, a vice president at the American Institute of Steel Construction in Chicago. His association reports that the nonresidential market is up 3 percent thus far this year, which, while not a big improvement, “at least shows we’re starting to climb. We’re not just bouncing on the bottom,” Cross says.

The nonresidential market’s resurgence has been led by growth in industrial construction, which began to rise in 2010 and will be up another 10 to 12 percent in 2011. On the other hand, building for retail operations remains sluggish, and school and other institutional facility construction has slowed with the tightening of public monies.

While the 67 percent decline in the nonresidential construction market since its 2007 peak has hammered the industry and its suppliers, steel has been buoyed somewhat by market share gains. Steel usage has increased to 58 percent of the total in the average project, up from about 48 percent just a decade earlier.

Further gains will be necessary to offset a market that today only dreams of previous peaks. “If this cycle is similar to other cycles in terms of its duration, we’ll see another peak in 2015-16,” Cross forecasts. “But that peak will probably be 20 percent below what we saw in 2007.”

Credit concerns, foreclosures and excess housing stock keep prices down and home buyers wary as residential construction remains sluggish. 

Three years after the United States plunged into recession, and five years removed from the point housing started its free-fall, the residential construction market continues to flounder.

Annual home construction starts, which topped more than two million at the height of the real estate boom, have languished below 600,000 units for the past two years. While 2011 is expected to see some pickup in activity, the improvement will likely be marginal.

“I had expected it to rebound a little sooner, or a little more robustly, but the first quarter came in pretty much the same as the last couple of quarters,” says David Crowe, chief economist for the National Association of Home Builders in Washington, D.C.

The data on home construction continues to send mixed signals, with every bit of positive information followed by more sobering statistics.

Existing home sales fell in April to a seasonally adjusted annual rate of 5.05 million, down 0.8 percent from March, according to the National Association of Realtors, Washington, D.C. That figure was 12.9 percent behind the 5.8-million-unit pace in April 2010. “Given the great affordability conditions, job creation and pent-up demand, home sales should be stronger,” says NAR Chief Economist Lawrence Yun.

Delinquency rates on residential mortgages were at 8.32 percent on all loans outstanding at the end of the first quarter, an increase of seven basis points from the previous quarter. That rate was 177 basis points below the same quarter in 2010, however, according to the most recent report from the Washington, D.C.-based Mortgage Bankers Association.

“Most of these numbers point to a mortgage market on the mend,” says Jay Brinkman, chief economist for the MBA. “Short-term delinquencies remain at pre-recession levels and loans 90 days or more delinquent have now dropped for five straight months.”

On the other hand, in its most recent monthly report, Fannie Mae delivered some troubling statistics that suggest the market is just now bottoming out. At the beginning of the year, construction activity reached its lowest levels since getting a homebuyer tax credit boost in April 2010. Moreover, real residential investment, which represented more than 6 percent of U.S. GDP in 2006, fell to a record-low 2.2 percent during this year’s first quarter.

“Single-family housing starts and new home sales have been flat at depressed levels since the temporary and small lift obtained from the tax credit around the middle of last year,” the report states. “Existing home sales have posted modest rebounds since the end of the tax credit. However, distressed sales continue to account for a large share of sales, and the share has risen in recent months.”

According to Doug Duncan and Orawin T. Velz, mortgage market analysts at Fannie Mae, “While weakness in housing in the first quarter may have been exaggerated by weather, a meaningful housing recovery this year is not expected. After being a drag on growth for five consecutive years, we expect residential investment to add just slightly to growth this year. And with very little help from housing, the economy will likely grow at a modest pace this year, similar to the 2.8 percent pace seen in 2010.”

The fact that housing is trailing the rest of the economy out of the recession is out of character. “Usually you see housing leading the rest of the economy. This time around it’s the reverse. It’s not a typical recovery for housing,” Crowe notes.

Several key elements are working against a robust climb for the residential market. For starters, the inventory of existing homes remains at higher-than-normal levels with 3.87 million for sale in April. That represents a 9.2-month supply at current sales rates—worse than March when supply was at 8.3 months.

The mortgage crisis continues to hold down the market. Each wave of foreclosures adds inventory to the pipeline and depresses prices for all homes—which is not necessarily good news for buyers. Potential homeowners are often scared by the bottoming prices, worrying that further price erosion is possible. Only when the market starts to recover will buyers feel comfortable making the big investment a home purchase entails. “Right now, that’s what’s keeping house prices from rising. When house prices start rising, oddly, that’s when people will feel comfortable buying,” Crowe says.

Further complicating the recovery is the continued difficulty for consumers to obtain financing, particularly first-time homebuyers. Homeowners buying in at the entry level allow other homeowners to trade up, driving the market.

National Association of Realtors President Ron Phipps says banks must return to sensible standards for lending. “We want to ensure that qualified buyers will be able to own their property on a sustained basis from a sound credit evaluation, but banks needn’t be so stingy as to only lend to those with the highest credit scores.”

Additionally, the association is concerned about proposed federal regulations, including one that would effectively raise down-payment requirements to 20 percent, “which would slam the brakes on the housing market,” says Phipps, noting that only one in five first-time home buyers could afford a 20 percent down payment.

Alan Beaulieu, president of the Institute for Trend Research in Boscawen, N.H., says changing attitudes are hindering the housing market, which he described as DOA. “We have a legislative problem, banks that do not want to be in the housing market any more. And we have a demographic problem. Younger folks are no longer excited about owning a home. They consider it a bad investment—it ties them down and limits their job mobility.”

Another trend that has begun to develop, and will likely continue even after a more full-fledged housing recovery takes place, is a move toward smaller homes, both in single-family and rental units. The median size of homes typically falls during recessions as builders downsize their projects to compete with lower-priced foreclosed properties. Crowe believes the trend toward smaller units will outlast the current market. “People are a little more careful about their money. They’re worried about energy costs. And with credit being tight, you have to modify your choices,” he says.

Geography also plays a huge role in the market’s strength. Four states with overheated real estate markets (California, Nevada, Florida and Arizona) suffered the majority of the damage when the market crashed, while some Midwestern manufacturing states (Michigan, Ohio and Illinois) also had economy-related foreclosures. Other areas, including the energy belt in the middle of the country, emerged from the crisis in far better condition.

Still, no housing market emerged from the downturn unscathed, says Jay Kessler, general manager for Brown-Strauss Steel. The Denver-based service center company has facilities from Kansas City west to California, and all of its regions continue to lag.

“Residential is a big part of our business, and it’s down 80 percent from its peak,” says Kessler. “The West Coast market is still way below construction levels of the mid-2000s.”

Even when a market seems to perk up, as the Kansas market did earlier this year, the optimism is short-lived. “There’s no consistency in the business. You can’t build on it,” Kessler says.

In contrast to the single-family market, there are signs of life in the multifamily sector. All of the household growth since 2004 has come in the form of renters, as homeownership has remained flat. Until recently, that rental demand has been met through the high vacancy rates in apartments, plus a steady stream of units coming out of foreclosure. “We’re about to run out of those,” Crowe says. Both housing sectors, the flatter single-family market and the more promising multifamily one, will increase first in areas with the most favorable jobs outlook, he adds.

It’s possible that a single change, such as a strengthening in home prices, could trigger pent-up demand and kick start residential construction. “We’ve got good low prices, good low mortgage rates, and an improving economy with jobs and rising income. It’s conceivable, once it gets moving, that we could get that herd effect.” Possible, he says, but not probable. “The more likely outcome is a slow process, with a few people at a time making the decision to move forward.”

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Thursday, November 27, 2014