Residential Building Products: A New Take on Cyclicality and Investment Upside

Key Takeaways

  • The residential building products sector was far healthier entering this COVID-19-driven recession than it was entering the Great Recession. This downturn will reset the conversation around building products cyclicality for the better.
  • While the near-term outlook remains uncertain, we see the prospect for a quick recovery for the residential building products industry, followed by several years of solid growth, creating strong investment appetite and M&A activity.
  • Beyond the underlying economic and housing data that highlights positive sector trends, there are several COVID-driven consumer dynamics that will continue to drive growth across the building products industry.


residential-building-products_thumbnail-4.pngThe residential building products sector entered 2020 on a high note, with positive industry fundamentals supporting an optimistic outlook. Q1 saw that momentum continue with a majority of building products companies reporting strong and, in some cases, record performance. Unfortunately, COVID-19 turned the tables, driving Q2 sales declines for many companies with uncertainty for the remainder of 2020.

However, the current pandemic-driven downturn is very different from the previous recession. The residential building products sector is in considerably better condition today than at the onset of the housing-driven Great Recession. Building products and construction companies have been designated essential businesses, helping the industry outperform others during the COVID-19 pandemic. Companies within the industry, as well as homeowners, were in stronger financial condition entering 2020 than at the onset of the Great Recession. Favorable industry fundamentals will support growth coming out of the COVID-19 environment, and several pandemic-driven tailwinds will drive incremental spend as the sector emerges.

In this article, Managing Directors Tim Webb and Mike Hogan and Director Graham Rives, all of the Harris Williams Building Products & Materials Group, explain what investors can expect from the industry in the next several years, and why many are likely to undergo a positive change in mindset regarding the sector.

Putting the Great Recession in the Rearview Mirror

During the last recession, the residential building products industry bore the brunt of the housing-led economic meltdown, which was driven by overbuilding supported by unprecedented growth in subprime mortgage lending and the resulting asset bubble. Today, while the building products industry is down like most other industries due to the COVID-19 pandemic, it’s a completely different—and much more positive—story.

For starters, notes Webb, industry supply and demand fundamentals paint a very healthy picture for the sector (see Building Products: Sit It Out or Get in the Game from January 2020). Unlike in the days leading up to the Great Recession, today’s housing market is substantially underbuilt. Over the last 10 years, single-family housing starts have experienced consistent growth but remain well below long-term averages, while multi-family starts have rebounded and are in line with long-term averages (Figure 1). 

Figure 1: Single-Family Housing Starts Below Long-Term Average (# in 000s)
Source: St. Louis Federal Reserve Bank

Additionally, household formations dramatically exceeded single-family housing starts in the pre-COVID-19 years, whereas the opposite was the case in the years preceding the Great Recession. From 2002 through 2006, total single-family starts exceeded household formations in the U.S. by more than two million units. From 2015 through 2019, single-family starts lagged household formations by more than 3.7 million units.1 This imbalance is an indicator of pent-up demand and unmet housing needs and should support growth in the coming years. The strength of the sector is also reflected in a host of other positive indicators, including mortgage rates, home prices, spending on restoration and repairs, and the available housing supply (Figure 2).

Figure 2: Additional Supportive Housing and Economic Indicators2

Source: St. Louis Federal Reserve Economic Data, National Association of Home Builders, and Harvard Joint Center for Housing Studies
In addition to the industry’s overall strength, individual building products companies are in better shape. In 2009 the building products sector began 10 years of moderately paced growth that continued into the first quarter of 2020—which itself was impressive given the length of the recovery.

First-quarter performance was among the strongest in recent years, with healthy backlogs across various industry sectors driven by strong construction spending and housing starts. Revenue was consistently up, with some companies reporting a record quarter.3 With a healthy banking sector and greater liquidity in the overall market, most residential building products companies are better positioned to withstand the current downturn.

Executive Perspective

“Through most of the first quarter, we enjoyed strong demand for new residential construction amongst the highest demand I've seen in my 35- year career.”

 – Steve Hilton, CEO of Meritage Homes

Source: Meritage Homes Earnings Call, April 29, 2020

“We are significantly stronger financially and leaner operationally than we were a decade ago. Many of the decisions made during the 2009 housing correction are benefiting us today.”

– Jerry Volas, CEO and Director, TopBuild

Source: TopBuild Earnings Call, May 5, 2020

Beyond the underlying economic data and the health of building products companies, homeowners themselves are in better financial shape today than in 2007 by multiple measures. “The easy-money days leading up to the Great Recession meant many more people could get mortgages for a home, or even multiple homes,” says Webb. “Yet some of them shouldn’t have been able to do so based on creditworthiness. This put them at much greater risk of foreclosure, which, as we know, is exactly what happened.”

Today’s homeowners have far higher credit scores, meaning they’re more likely to have the financial wherewithal to withstand a downturn—and not lose their homes (Figure 3).

Rives notes another positive trend: “We also see fewer homeowners today taking on debt against their home’s equity to fund, for instance, the purchase of a second home or extract cash to spend outside of the home.”

Figure 3: Credit Quality on the Rise with Fewer Homeowners Tapping into Home Equity ($ in Billions)

Sources: New York Federal Reserve Bank; Freddie Mac

The team says all of this adds up to one key takeaway: Although the residential building products sector maintains some cyclical exposure, time will likely show the impact of the Great Recession on the sector to be a unique event. “The industry’s performance during other, less housing-centric downturns is more reflective of its true cyclicality,” explains Webb. “Increasing recognition of this among investors could lead to increased deal activity and people starting to view building products in a different light.”

Investors have been anchored to the Great Recession as a reference point for the building products industry, increasing the perceived magnitude of broader economic cyclicality on the industry. In other non-housing-related downturns, the decline in housing activity has been far more modest, sometimes in the single digits (Figure 4). This downturn will be the most recent data point for investors to build into their models.

Figure 4: Historical Housing Starts (Single and Multi-Family) and Prior Recessions


Source: U.S. Census Bureau

The current downturn will also reset how investors view the industry’s cyclical exposure relative to other industries. The building products industry is forecasted to outperform most other cyclical industries during the current downturn, aided by companies in the sector being deemed essential, thus keeping operations going during the pandemic (Figure 5).

 Figure 5: Great Recession and COVID (Consensus 2020 Declines from 2019) Revenue Declines for Select Cyclical Industries (S&P Indices)

Note: Cyclical sectors include Energy, Materials, Homebuilders, Financials, Real Estate, Consumer Discretionary, and Industrials, and exclude Communication Services, Consumer Staples, Information Technology, Utilities, and Healthcare based on the S&P sector indices.
Source: CapIQ as of 6/19/20
Coming out of the pandemic, investors will be more excited about opportunities in the building products sector. The sector is in far better shape today than heading into and during the Great Recession, with favorable underlying housing market fundamentals, healthy companies positioned to withstand the downturn, ample liquidity in the broader market, and a base of homeowners in much stronger financial condition. Additionally, the magnitude of the current cycle is in line with more moderate downturns and, relative to other cyclical industries, the buildings products industry is projected to outperform during the current pandemic.

What’s in Store for the Industry?

Overall, Webb, Hogan, and Rives are optimistic for a quick recovery, with the potential for building products to lead the way in the recovery, followed by several years of growth driven by favorable underlying homebuilding trends and several post-pandemic changes to consumer preferences. Changes in consumer preferences aside, pre-COVID-19 housing shortages in the U.S.—as the population continues to grow and new households are formed—should drive strong growth for companies in the residential building products space. Additionally, an unprecedented rise in unemployment has created a surplus of available labor that will be attracted to the essential nature of the building products and construction industry. This should remove what acted as a governor in the post-Great Recession recovery—a shortage of labor within the sector. 

The number of households has been steadily increasing since the 1960s, and that trend is expected to continue. In the past decade alone, U.S. households rose from 117.5 million to 128.5 million—an increase of nearly 10%.4 This continued trend, in turn, will place even more pressure on the industry to ramp up to meet demand.

In the longer term, according to the Harvard Joint Center for Housing Studies, the number of U.S. households will increase by 13.6 million between 2015 and 2025, and by 11.5 million between 2025 and 2035.5 With an undersupply of housing in the market, building products demand will remain elevated in the near term, which bodes well for companies exposed to the new-residential construction industry. 

Consumer preferences are changing as individuals rethink the way they live in a post-COVID-19 world. These changes include people moving from cities to suburbs, homeowners retrofitting their homes to optimize remote work capabilities, and expanding living and entertainment spaces as families spend more leisure time in and around their homes. 

“From a consumer perspective, money formerly dedicated to travel and entertainment may be reallocated to home R&R,” says Rives. “These efforts will probably begin with smaller, low-ticket do-it- yourself activities and eventually shift to larger-ticket projects. Continued low interest rates should also boost consumer demand, although changes to discretionary income may limit the rebound.”

In the near term, COVID-influenced consumer preferences have proven positive for smaller DIY products used within the house as well as the outdoor living sector (patios, pools, and yards, for instance), as homeowners look to improve and expand living spaces and find additional forms of entertainment. This trend could continue in the long term after COVID-19.

Additionally, the potential exists for a reversal of the multi-year trend of people moving from the suburbs to more walkable, amenity-filled urban areas—which has been fueled by both millennials and empty nesters. According to a Harris Poll survey, nearly one-third of Americans are considering trading densely populated areas for more open spaces.6

Executive Perspective

“I remain optimistic about the long-term outlook for our industry post-COVID-19, given the demographic changes occurring in our country, the undersupplied nature of our housing stock, and changing home- buying patterns with the view that working from home will provide comfort to families.”

– Doug Bauer, Director and CEO, TRI Pointe Group
Source: TRI Pointe Group Earnings Call, April 23, 2020

“We believe that the pandemic will further drive household formation and R&R activity, similar to the impact of 9/11 on our sector. And while our industry had good real momentum coming into this period, we were still just trying to catch up with the need for housing in the United States.”

– Nicholas Ian Fink, CEO and Director, Fortune Brands Home Security

Source: Fortune Brands Home Security Earnings Call, April 30, 2020

“We also expect the work-from-home phenomenon will have legs, as more companies and employees get comfortable with the arrangement and find productivity actually might increase,” says Webb. According to an IBM survey, more than three-quarters of U.S. adults want to continue working from home occasionally, and half would like it to be their main work routine.7 Another survey, by Upwork Inc., found six in 10 hiring managers anticipate having more remote work for new employees than before the onset of COVID-19.8

A number of tech companies and those with the capabilities to allow remote work are already leading the charge to make working from home a permanent option. Facebook, for instance, plans to enable most of its 50,000 or so global employees to switch to remote working, and believes that its workforce will be largely remote within a decade.9 This trend will be a positive factor for the residential sector of the industry—more homeowners will likely seek to upgrade their homes to make telecommuting easier and more comfortable.

Executive Perspective

“You know, they've been trapped in their homes for two months….They're going to want to have a bigger home. They're going to want to have this or that. So there's a lot of reasons to believe that, coming out of this, there are going to be some positive housing trends.”

– Jerry Volas, CEO and Director, TopBuild Corp

Finally, severe job losses in sectors of the economy more damaged by COVID-19 have expanded the available labor pool for construction and building products companies. In the decade following the Great Recession, the recovery for home builders and building products companies—particularly in more recent years—was slowed due to low unemployment rates and difficulty finding labor to meet market demand, increasing hourly labor costs, and the time needed to complete projects. An NAHB survey from February 2020 showed labor cost and availability as the leading concern for home builders in 2019 and 2020, with 85% of respondents citing the issue as a significant problem.10 With severe job losses in leisure, hospitality, and other service sectors of the economy, labor shortages should no longer be an impediment to meeting demand in the coming years.

Another data point suggesting a quick recovery and near-term optimism is the Housing Market Index (HMI) survey of NAHB members (Figure 6). In the current downturn, the HMI dropped down to the mid- to high 30s in April and May 2020 but has quickly rebounded to 58 in June. For comparison, during the Great Recession, the HMI remained below 50 for 85 consecutive months, finally rebounding to a reading in the 50s in June 2013 (note: a reading above 50 reflects a positive outlook for home sales; a reading below 50 reflects a negative outlook).

Figure 6: NAHB / Wells Fargo National HMI (Seasonally Adjusted) – January 2000 through June 2020

Source: National Association of Home Builders

Overall, the building products sector is poised for a quick recovery, with ample runway supported by positive long-term fundamentals. Additionally, changing consumer preferences should drive spending in and around homes, while an expanded labor pool will enable companies in the sector to meet increased demand.


The building products industry enjoyed 10 years of growth, albeit at a moderate rate, coming out of the Great Recession and continued that momentum into 2020 before COVID-19 tapped the brakes. Like all industries, the building products industry has felt the pandemic’s impact. However, building products and construction companies being deemed essential businesses by the vast majority of state and local governments, in conjunction with favorable industry tailwinds, will help support a quick recovery. This expected early recovery, supported by strong industry fundamentals, should lead to several years of robust growth for construction and building products companies.

Overall, the industry was strong going into the current downturn and will only grow stronger as consumer preferences change. With an underbuilt housing market, increased availability of labor, healthy demand heading into the crisis, and favorable shifts in consumer preferences, the sector is primed for growth and should provide strong investment opportunities.

Published June 2020
1 . These calculations are derived by taking the difference in FRED estimates for U.S. household formations and new single-family starts.
2. St. Louis Federal Reserve Economic Data, National Association of Home Builders, and Harvard Joint Center for Housing Studies
3. 2020 Q1 company earnings call transcripts.

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