In the construction industry (and most businesses in general), one of the most dangerous pitfalls you can make is falling into a trap of over-forecasting.
It is human nature to want to justify investments or strategies by relying on the best-case scenario but, it is exceptionally rare that we ever see that best case develop. This is a lesson that I had to learn myself as a sales manager. In the construction industry, over-forecasting can lead to a number of calamitous outcomes.
Think back to late 2013. Several industry analysts were calling for a dramatic spike in housing starts for 2014 (including one who believed we would reach an almost normalized level of 1.4M starts in 2014). As a result, many manufacturers set unrealistic expectations for growth. By the time we hit July, it was apparent we would come nowhere near the forecast and almost every company I worked with was reporting that they had massive budget cuts, shifts were being cut at the plants and salespeople were extremely frustrated as they were looking at making substantially less money than the year before.
As we’re starting to see some positive figures in the new construction and remodeling markets lately, I’m starting to see some other pundits tossing out figures that are simply unbelievable.
I will go on record here and now to tell you that we will NOT hit 1.5M housing starts next year. I don’t foresee us getting near this figure until 2018 and, even then, I don’t think we’re going to quite reach 1.5M starts. Yes, there is a lot of pent-up demand in the millennial sector. However, the options offered to the entry level group are not plentiful enough to get us to 1.5M starts. Think about it: most banks still want 20% down and a 720+ credit score. Know many 27 year olds that can satisfy those requirements? Our model is currently predicting 1.185M starts in 2016 and is based upon a blend of indicators and what our 400+ researchers are seeing in the field. Here is our current starts forecast:
Moreover, a conservative forecast makes a lot of sense on the backdrop of what is happening with current renters. Below is a chart from GALLUP based on a survey they did earlier this year. The net-net of this is that non-homeowners are pushing off home purchase farther into the future. Renting is not about a short transitional phase of growing up. Rather, it has become a stage of life. Getting married later, having kids later, this is all pushing out the timeline for household formation and home purchase. Combine it with the demographics of which economic cohorts are generating the most population growth, and it paints a picture that an explosion in additional home ownership is not likely to happen in the near term.
On the remodeling side, as of last quarter, we are at a new all-time high for remodeling activity according to our Residential Remodeling Index, the industry’s most reliable remodeling forecast. Consequently, we are expecting the growth rate to slow down a bit over the next several quarters. We’re still going to see growth but, instead of the 8% we experienced a few years ago, we’ll be closer to 4% growth from 2015-16. Again, I've see other sources claim that we'll see a growth rate closer to the 8% seen in previous years but our model doesn't agree with that kind of aggressive growth nor does that marry up with what I hear from remodelers and manufacturers. See the chart below for our current forecast of remodeling activity.
The bottom line is that you shouldn’t be fooled by the wildly optimistic. When forecasting, a conservative approach is always the better way to go. Moreover, it is a very good thing we aren’t seeing explosive growth as that is one of the primary contributors to the bubble bursting in the first place. Steady, sustained growth allows for proper planning and incremental opportunities.
To learn more, please send me a note at firstname.lastname@example.org
and we can talk about how the most accurate forecast in the business can help you understand where the growth will happen and how to take activate new customers.
Read More >