Builders have a unique opportunity in the fourth quarter. They may find themselves the “belle of the ball” among their suppliers but should think carefully about what comes next.
Builders: Choose your suppliers carefully. A shifting supply/demand environment is ahead. The largest competitor for your building materials is slowing (temporarily), and a window of opportunity may emerge to evaluate suppliers.
The industry is shifting: Homeowners historically either moved or undertook a major remodel every 11 years, but the mix has recently skewed toward remodels: 25 years ago, homeowners were 4:1 more likely to move, but today the mix is nearly equal, with homeowners choosing to move only 1.3 times per remodel. The reasons are mixed but are exacerbated by a low supply of available homes, a shift to older demographics, the lock-in effect from recent jump in mortgage rates, and a festering underlying shift to lower mobility the past 40 years (which I think may improve the next cycle, but that is a different research topic for another day). As a result, any change in remodel VOLUME has a larger impact on the overall supply/demand balance of materials versus new construction than it did during prior decades.
Buying a different home and remodeling are imperfect substitutes for each other, and often compete for similar building products. A homeowner who is dissatisfied with their home can choose to move to a better one, or they can simply stay where they are and attempt to move. Hence the uptick in popularity of numerous HGTV shows like “Property Brothers: Forever Home” and, of course, the long-beloved “Fixer Upper.” The idea being that a mediocre home becomes more livable when renovations occur. When these remodels occur, they compete for appliances, furniture, flooring, and other products that builders need to deliver their homes.

Major remodels are just starting to soften. We don’t expect the industry to sequentially shift until about mid-2024, albeit with notable differences by category. We gave our research clients notice last month that overall backlogs are down 10% to 15% from first quarter levels (recall that second quarter backlogs sequentially improved, so the pricing environment over the next three to six months will feel far different than it did this summer). Pro contractors report increased levels of pushback by their end consumers on exterior projects in the third quarter. Time will tell how the other categories perform.
At the same time, inventories of suppliers are still elevated but should be in line with norms by mid-2024 or earlier—in our view, lumber inventories could possibly thin by another -7%, with specialty products with another -15% correction. These numbers may not directly change your quoted prices, but the window for negotiation is open for the next few months, and then—we think—may close. Historically, inventories took about three to four quarters to properly adjust, which means the spring season will be a more tricky and dynamic negotiation between builders and suppliers than it has been in prior years. Expect very different negotiation opportunities between product categories: None for roofing, more for other interior categories with high DIY exposure like flooring.


Our view: Don’t get complacent and choose your partners and suppliers very carefully. Do you remember how quickly the building products planning environment changed from fourth quarter 2019 to fourth quarter 2021? The industry felt an initial softening in demand, with lower prices and plenty of inventory, which was a unique opportunity amid pandemic fear. The industry shifted quickly when the market bounced due to underlying structural factors, and the entire negotiation changed for building products and builders. Success was less about price and more about competency and reliability. We think the setup in the future could end up very much the same. Any weakness in inventories and pricing driven by temporary declines in home improvement will be short-lived. In the long run, structural factors are likely to drive building product demand meaningfully higher from 2025 to 2030, which we think could be remembered as the “Golden Age of Remodeling.” This means significantly more demand and purchasing competition from the largest part of the building products market. The scale of future swings in demand appear poised to be larger and more cyclical. After all, there are 85 million homeowners who have statistically been underinvesting in their properties and will either purchase a new home or see fit to fix their old one up.
One last nugget: There was a time when building product manufacturers offered seasonal discounts and saw much larger swings in demand. Remember roofing many years ago? We don’t see that discounting occur anymore. It means that future production swings—and pricing—could be more challenging. As volatile as the past three years have been, the seasonal swings in demand that building product manufacturers faced were significantly lower than normal. This shift was meaningful enough that the Census estimate of seasonal changes in housing construction has been more consistent since 2020 than in the entire history of construction data, effectively giving production planning departments within the building product industry a feather in their respective planning caps—even if they didn’t appreciate it. The point is this: As bad as inventory planning and logistics were 2020-22, it could have been even worse.
But suppose seasonal volatility were to normalize? Say in 2024 or 2025? It may mean more volatility in inventory levels, and more pricing and margin shenanigans for building product suppliers—and builders. All at the same time that the largest part of the industry begins competing with builders for product availability.
Buckle up. Volatility tends to show up in prices first. Choose your partners carefully and deliberately. Don’t get complacent.
