Opportunity in the New Home Construction Space Opens Door for Continued Building Products M&A in 2023

Despite the headwinds facing the market, most economists do not believe declines in home prices or new construction will reach anywhere near 2008 levels:

• Limited housing inventory is expected to prevent large home price drops for most of the country according to NAR, which forecasts a 0.3% increase in annual median home prices in 2023.
• Banks were more cautious in the number of subprime mortgages they approved.
• Consumers are in a better financial position today than they were in 2008.
• Demographic trends are accelerating and driving the need for homes.
• There remains a critical under supply of single-family homes.

Market conditions are “fundamentally different than those experienced during the Great Recession,” observed NAR Chief Economist Lawrence Yun, who shared his 2023 outlook at the 2022 NAR NXT, The Realtor® Experience in November. “Housing inventory is about a quarter of what it was in 2008. Distressed property sales are almost non-existent, at just 2%, and nowhere near the 30% mark seen during the housing crash. Short sales are almost impossible because of the significant price appreciation of the last two years.”

Other key building products market observations include:

• Overall, there remains a significant shortage of affordable homes. During the decade following the Great Recession, fewer homes were built compared to any other decade since the 1960’s. Material and labor shortages then exacerbated this trend due to COVID-19. Industry sources estimate the housing shortage in the U.S. stands at 3.8 million to 5.8 million homes. Speaking to analysts and investors in a December 2022 presentation, Nicholas Ian Fink, CEO of Fortune Brands Innovations emphasized the long-term fundamentals in new construction, highlighting the housing shortfall in the U.S., “It’s really too much demand chasing too little supply.” Fink continued, “Timing is discretionary when it comes to housing construction, but the need is absolutely not. Harvard Joint Center I’d say has estimated that 12 million new households will be formed in the next 10 years. And that’s into a market supply environment that we believe is underbuilt by 3 million homes. That’s a lot of homes. And according to some estimates, that’s actually conservative.”

• Houses built during the housing boom experienced between 2003 and 2007 are coming into their prime renovation age, and the trend of consumers investing in their homes is expected to continue. Growth in the repair and remodeling market, while slowing, is forecasted to remain positive through much of 2023. The Harvard Joint Center for Housing Studies (JCHS) has projected year-over-year growth to decelerate from 15% in Q1 2023 to 6.5% by Q3 2023. This compares to 16.1% growth in 2022. “Although remodeling market gains are expected to cool significantly next year, homeowners still have record levels of home equity to support financing of renovations,” said Abbe Will, Associate Project Director of the Remodeling Futures Program. “Energy-efficiency retrofits incentivized by the Inflation Reduction Act of 2022, as well as disaster repairs and mitigation projects following Hurricane Ian will further support expansion of the home remodeling market to almost $450 billion in 2023.”

• Millennials, the largest segment of the population, are entering their prime home buying age and should help boost long-term demand. According to the NAR 2022 Home Buyer and Seller Generational Trends report, Millennials comprised 43% of homebuyers in 2021—the most of any generation. Millennials have made up the largest share of home purchase mortgage applications for the last six years, according to CoreLogic, with their share rising to its highest level in 2022. Archana Pradhan, Principal and Economist at CoreLogic, observed, “There are still many younger Millennials under 30 who have yet to become homeowners, so the demand from these Millennials is likely to remain strong in the coming years. At the same time, older Millennials are more likely to become repeat homebuyers. The share of Millennial repeat buyer home-purchase applications was already 43% in 2022, eight percentage points higher than Gen X’s share.”

For strategic buyers and private equity investors, 2023 could present a unique opportunity to acquire premium assets at conservative valuations, setting up for robust future growth as the U.S. seeks to correct its housing stock supply and demand imbalance. Additionally, distressed sales may present buying opportunities for well-capitalized industry players.

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Our Building Products investment banking team is highly experienced in the residential and commercial construction and infrastructure segments. We have successfully completed transactions across a wide range of end markets, from basic building materials such as aggregates, lumber, and pavers and pre-cast products, to complex fenestration extrusions, glass fabrications, curtain wall, and highly engineered specialty coatings products.     

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