caba soft market vshort

Dedicated to improving home building since 1964.

Implications of the Soft Housing Market on Suppliers of Building

Products

CABA’s Internet Home Alliance Research Council Family Ecosystem Forum

October 30, 2007

Benton Harbor, MI

2

NAHB Research Center Overview

Lab Testing & Certification Products & installation processes

Quality Assurance Programs Market Research

Syndicated & custom research Qualitative & quantitative Applied & theoretical www.housing-commercialization-tools.com

Field Evaluations & Demonstrations Information Dissemination Through ToolBase.org

3

Completed June 2007

State-of-the-Art Lab & Market Research Facility

4

Recent Cycle of U.S. Housing Production

Sources: Census

Excess demand drove unsustainable new residential development

Why the excess demand? Low interest rates increased affordability Home value appreciation Aggressive lending tactics in sub-prime market

Market correction was expected to account for overproduction (400K to 600K units)

Not-so-soft landing Correction taking longer than expected—fears

of home value depreciation ??? Bottom out @ 1.2 million units in Q4 ’07

or Q1 ’08 ???

5

New Residential Housing Permits

Source: U.S. Census Bureau (through September 2007)

0

500

1,000

1,500

2,000

2,500

3,000

Perm

its X

1000

Single Family Multifamily Manufactured Shipments Total2000 2002 2003 2004 2005 20062001 2007

6

Total U.S. Construction Spending

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jul-0

2

Nov-0

2

Mar

-03

Jul-0

3

Nov-0

3

Mar

-04

Jul-0

4

Nov-0

4

Mar

-05

Jul-0

5

Nov-0

5

Mar

-06

Jul-0

6

Nov-0

6

Mar

-07

Mill

ion

s o

f D

olla

rs

Nonresidential Residential Total Construction

Source: U.S. Census Bureau (through August 2007)

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2007 Study: “Implications of the Soft Housing Market on Suppliers of

Building Products”

Objective: to gain understanding of the new industry environment

Changes in business and construction practices Changes in relationships with suppliers,

subcontractors, and homebuyers Changes in attitudes towards trends, such as energy

efficiency and “green building” Changes in drivers of product specification and

purchase

8

Study Methodology

“Discovery” phase through group discussions of 3 – 4 builders to understand scope of issues

Conducted by phone Custom & production Multi- and single-family Wide geographic representation

“Validation” phase through nationwide, representative survey of 320 builders

Results weighted by housing starts to achieve accurate picture of the market

9Source: NAHB Research Center, Inc.

How Builders Describe Their Local Market Conditions

19%

19%

27%

27%

37%

41%

59%

64%

0% 10% 20% 30% 40% 50% 60% 70%

About the Same as Last Year

Housing Market Crash

Getting Back to a Normal Market

Housing Bubble Has Burst

Housing Slump

Mild Downturn in Home Sales

Market Has Softened

A Buyer's Market


Areas Where Builders are Very Likely to Improve or Innovate

18%

22%

27%

27%

30%

32%

33%

34%

39%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Land Development and Planning

Market Research

Choice of Products and Materials

Managing Supplier Relationships

Constructing Homes

Designing Homes

Purchasing Products

Managing Subcontractors

Selling Homes

Share of respondents rating a 5 on a scale of 1 to 5

11

Areas Where Builders Are Very Likely to Improve or Innovate

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Land Development and Planning

Market Research

Choice Of Products and Materials


Constructing Homes

Designing Homes

Purchasing Products


Selling Homes

Custom Builders Production Builders


12

Areas Where Builders Are Very Likely to Improve or Innovate--Regions

0% 10% 20% 30% 40% 50% 60%

Market Research

Land Development



Choice Of Products And Materials

Designing Homes

Purchasing Products

Constructing Homes

Selling Homes

Northeast Midwest South West


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Implications

Now is an outstanding time for a supplier to innovate—builders are more open to innovation West is most open, followed by the Midwest Selling homes is getting the most attention

Suppliers to production builders—consider approaches to help improve builder sales Customer-facing literature Supply attention-getting web content On-site demonstrations of products Referral programs

Suppliers to custom builders—consider… Opportunities to help builders better construct homes This segment may be best initial target for

new/innovative products—more open for enhancing their customer’s choice of alternatives


Attracting Buyers to Sales Offices

31%

41%

44%

49%

57%

58%

66%

69%

70%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Larger Sales Commissions

Design Centers for Sales Process

Co-Op Advertising With Suppliers

Focus On Specialty Markets

Educate Customers

Advertising or PR Campaign

Listen More To Customers

Make Website Better Sales Tool

Referrals From Past Customers

Share of respondents rating a 4 or 5 on a 5 point scale


Attracting Buyers to Sales Offices

0% 10% 20% 30% 40% 50% 60% 70% 80%

Larger Sales Commissions

Design Centers for Sales Process

Co-Op Advertising With Suppliers

Focus On Specialty Markets

Educate Customers

Advertising or PR Campaign

Listen More To Customers

Make Website Better Sales Tool

Referrals From Past Customers

Custom Production


16

Implications

Production builders far more likely to use web to draw customers, use advertising

Custom builders more likely to focus on relationships with home buyers

Consider non-traditional ways to help builders: Generate referrals Provide content for web sites Generate web traffic Help builders create more effective, sales-

focused websites


Strategies to "Close the Sale"

16%

20%

21%

25%

19%

28%

22%

35%

35%

37%

44%

42%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Decreasing the Size of New Homes WeOffer

Lowering Our Home Prices

Offering More Upgrades as StandardFeatures

Offering More Incentives--Like FreeUpgrades or Larger Decorating Allowances

Allowing More Modifications of HomePlans

More Innovative Materials to Set OurselvesApart From Other Builders

Plan to Make Have Already Made


Benefits Most Likely to Persuade Builders to Purchase Innovative Products

21%

26%

27%

29%

32%

32%

32%

36%

36%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Allow Direct Purchases

More Stable Prices

Reduce Business Risk

Higher Quality, Fewer Defects

Reduce Construction Cycle Time

Reduce Labor Costs

Costs Less

Increase Curb Appeal

Better Value

Share of respondents rating a 5 on a 5 point scale


Benefits Most Likely to Persuade Builders to Purchase Innovative Products

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Allow Direct Purchases

More Stable Prices

Reduce Business Risk

Higher Quality, Fewer Defects

Reduce Construction Cycle Time

Reduce Labor Costs

Costs Less

Increase Curb Appeal

Better Value

Custom Production

Share of respondents rating a 5 on a 5 point scale


Builders More Likely to Pursue the Following Relative to Subcontractors

22%

36%

72%

73%

81%

86%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Subcontractor to Sell Upgrades to HomeBuyers

Subcontractor to Begin SupplyingMaterials

Look for New Subcontractors for BetterPricing

Look for New Subs for Improved Qualityor Reliability

Negotiate with Existing Subs for BetterPricing

Reduce Subcontractor Waste &Inefficiencies



Builders More Likely to Pursue the Following Relative to Subcontractors

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Subcontractor to Sell Upgrades to HomeBuyers

Subcontractor to Begin SupplyingMaterials

Look for New Subcontractors for BetterPricing

Look for New Subs for Improved Qualityor Reliability

Negotiate with Existing Subs for BetterPricing

Reduce Subcontractor Waste &Inefficiencies

Northeast Midwest South West


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Implications

Capitalize on builder motivation to improve the efficiency and reliability of subcontractors.

May signal desire for products that: Are less prone to improper installation Reduce labor cost by decreasing skill or time for

installation Reduce a builder’s reliance on subcontractors

Greatest dissatisfaction with subcontractors in South (opportunity?)


Methods Builders Use to Evaluate New and Innovative Products and Materials

9%

29%

35%

36%

50%

50%

57%

59%

60%

60%

0% 10% 20% 30% 40% 50% 60% 70%

We avoid new technologies

Independent Reviews

Evaluate in one community first

Market research

Sales literature/distributor recommendations

Conduct our own small scale tests

Visit job site to see in use

Manufacturer's product support capabilities

Evaluate on one house first

Manufacturer's independent testing



Methods Builders Use to Evaluate New and Innovative Products and Materials

0% 10% 20% 30% 40% 50% 60% 70%

We avoid new technologies

Independent Reviews

Evaluate in one community first

Market research

Sales literature/distributor recommendations

Conduct our own small scale tests

Visit other builders job sites

Manufacturer's product support capabilities

Evaluate on one house first

Manufacturer's independent testing

Custom Production



Trends Becoming More Importantto Builders

24%

30%

31%

51%

58%

61%

70%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Modular Construction

Panelized Construction

Zero-Energy Homes

Green Building

Design for Aging in Place

Low Maintenance Homes

Energy Efficiency


27

Implications

Major trends supported by Baby Boom generation Energy efficiency = low energy cost on

fixed incomes Low maintenance Design for aging in place

Green building finished 4th despite large amount of press it receives


Importance of "Green Building" Benefits in Builder Purchase Decisions

38%

49%

51%

57%

65%

66%

84%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Reduce Greenhouse Gases

Reduce Dependence on Foreign Oil

Reduce Water Usage

Improve the Environment

Improve Indoor Air Quality

Make the Home a Safer Place

Lower Energy Bills


29

Importance of "Green Building" Benefits in Builder Purchase Decisions

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Reduce Greenhouse Gases

Reduce Dependence on Foreign Oil

Reduce Water Usage

Improve the Environment

Improve Indoor Air Quality

Make the Home a Safer Place

Lower Energy Bills

Custom Production


30

Implications

Top tier response benefits accrue: Directly to occupants, In short time frame, and Are easily measured

Bottom tier responses benefits accrue: Indirectly to occupants In an uncertain time frame, and Are less easily measured

Custom builders far more likely to favor bottom tier benefits

31

Shifts in Home Builder Focus

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Investigate Niche Markets

Build More in Urban Developments

Purchasing Less Raw Land, or Selling OffDevelopment Land

Build More Condos and Multi-family Units

Focus More on Remodeling Projects

Build More Non-residential Buildings

Not Considered Decided Not To Do Plan To Do Have Already Done

Source: NAHB Research Center, Inc.


Shifts in Home Builder Operational Focus: Planning to, or Have Already Done

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Purchasing Less Raw Land, or Selling OffDevelopment Land

Build More Non-residential Buildings

Focus More on Remodeling Projects

Build More in Urban Developments

Build More Condos and Multi-family Units

Investigate Niche Markets

Custom Production


33

Residential Improvements and Repairs Expenditures

Source: U.S. Department of Commerce

Recession

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

260,000

1997

-Q2

1997

-Q4

1998

-Q2

1998

-Q4

1999

-Q2

1999

-Q4

2000

-Q2

2000

-Q4

2001

-Q2

2001

-Q4

2002

-Q2

2002

-Q4

2003

-Q2

2003

-Q4

2004

-Q2

2004

-Q4

2005

-Q2

2005

-Q4

2006

-Q2

2006

-Q4

Mil

lio

ns

of

Do

lla

rs

Source: U.S. Census Bureau

34

Product Purchase and Specification Decisions of National and Regional Builders

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Home Architectural Design

Standard Features and Upgrades

Products and Materials Specs

Suppliers of Products and Materials

Brand or Manufacturer of Productsand Materials

Corporate Office Decision Split Between Corporate and Local Local Operations Decision

Source: NAHB Research Center, Inc.

35

Change in Size of New Single Family Homes

2005 2006 Change

Average SFD 2,382 2,420 +2%

SFD Starter 1,651 1,631 -1%

SFD Move-up 2,410 2,363 -2%

SFD Luxury 3,608 3,620 0%

Source: Annual Builder Practices Reports, NAHB Research Center, Inc.

36

Change in Distribution of New Single Family Homes by

Price-Point

2005 2006 Change

Starter 34.0% 31.9% -2%

Move-up 47.7% 46.5% -1%

Luxury 18.3% 21.6% +3%

Total 100% 100% 100%


37

Kitchen Countertop Material Usage in New SFD Homes

2005 2006 Change

Solid Surfacing 17% 13% -4%

Laminate 40% 36% -4%

Ceramic Tile 9% 4% -4%

Engineered stone 1% 3% +2%

Granite 31% 40% +9%

Other natural stone 1% 3% +2%


38

Exterior Finish Materials In New SFD Homes

2005 2006 Change

Brick 20.8% 21.2% +0.3%

Stone 5.7% 7.4% +1.6%

Stucco 24.2% 21.4% -2.8%

Vinyl 23.0% 22.7% -0.3%

Fiber Cement 14.4% 14.2% -0.2%


39

Share of New SFD Homes with Home Electronics Systems

2004 2005 2006

Intercom / Entrance Phone 5% 7% 5%

Video Entrance Phone 1% 1% 1%

Whole home automation 2% 3% 2%

Non-Monitored Security System 24% 24% 27%

Monitored Security System 20% 19% 21%

Lighting control system 2% 4% 2%

Communicating Thermostat 1% 1% 1%

Monitored fire / toxic gas alarm system 10% 12% 11%

Whole-house Audio System 8% 10% 10%

Whole-house Video Access 4% 4% 5%

Built-in Home Theater 5% 10% 6%


40

Starter Moveup Luxury

Intercom / Entrance Phone 2% 5% 12%

Video Entrance Phone 0% 1% 4%

Whole home automation 1% 1% 6%

Non-Monitored Security System 19% 31% 32%

Monitored Security System 10% 20% 36%

Lighting control system 1% 1% 6%

Communicating Thermostat 1% 1% 2%

Monitored fire / toxic gas alarm system 7% 9% 23%

Whole-house Audio System 5% 7% 27%

Whole-house Video Access 2% 2% 15%

Built-in Home Theater 1% 4% 15%


Share of New SFD Homes with Home Electronics Systems

41

Price per Square Foot for U.S. Homes by Category

2004 2005 2006

All SFD Homes $124 $135 $148

Starter $101 $104 $108

Moveup $114 $124 $134

Luxury $160 $182 $190


42

Shares of SFD Homes with Structured Wiring

2004 2005 2006

All SFD Homes 39% 42% 41%

Starter 31% 31% 25%

Moveup 38% 46% 46%

Luxury 54% 61% 58%


43

Going Forward…

“Soft Market” survey to be repeated in January, 2008

Results to be reported in educational seminar @ IBS 2008

Detailed data now available for 2007 study

Dedicated to improving home building since 1964.

Ed HudsonDirector, Market Research Division

NAHB Research Center400 Prince George’s Blvd Upper Marlboro, MD 20774

(toll-free) 800-638-8556 (fax) 301-430-6180

www.nahbrc.org

caba soft market vshort

Business

share of respondents

point scale

soft housing market

advertising custom builders

builders reliance

builders results

web traffic help builders

builders better construct