Both Georgia Gulf and Omnova mentioned an anticipated housing recovery in their presentations at yesterday's Houlihan Lokey Global Industrials Conference here in New York. With construction being a major chemicals end market that has seen little, if any, recovery, this comes as no surprise. Omnova CFO Michael Hicks noted that the company's housing-dependent carpet chemicals business is still having a tough time, but he seems to think things will turn around in 2012 and 2013 as the housing market recovers.
Georgia Gulf's chlorovinyls business, aided by cheap feedstocks, has been doing better, but continued expansion is at least in part contingent on a rebound in the housing market. The company figures 1.3 million is a "normal level" of housing starts, says CFO Greg Thompson, though it has not made any predictions as to when we will reach that. Other forecasts would seem to support that view – IHS Global Insight expects U.S. housing starts to reach 1.4 million in 2013.
There's a problem, though. April's housing report was, frankly, abysmal. Starts fell to a 523,000 annual rate, lower than in 2009. It's true that the U.S. population is growing faster than that, so it stands to reason that starts will pick up eventually. And 1.3 million starts is not a terribly high number – it is lower than any year from 1994 to 2007.
Still, it's worth noting that attitudes towards homeownership appear to be changing. Lately, I've seen a lot of questioning the notion that owning a home is always a good idea. Younger Americans are increasingly showing a preference for smaller, even multi-dwelling, homes. If larger numbers of Americans prefer multi-family, rental living, or perhaps settling in inner-city fixer-uppers, that's bad news for the chemical industry. Smaller and denser homes require fewer construction materials and, hence, chemicals.
It seems to me that industry executives need to realize – and not just realize, but bake into their strategies and forecasts – that what has passed for normal for the past three decades will not be normal during the next three. I'm not sure I'd take the under on 1.3 million housing starts in, say, 2015, but listening to many execs I do get the feeling that many don't quite realize the extent to which the U.S. economy has irrevocably changed. I don't know what's going to happen, but I do believe we're currently lurching towards a 'new normal.' If we are, basing your strategy on the past five, or ten, or twenty years, is a dicey proposition.