Engineering, Construction and Building Materials Industry Review Q3-2008; McGladrey Capital Markets

Key Trends

Since 2006, the new-home construction and home improvement industries have suffered from declining asset values exacerbated by rising mortgage interest rates. Even the once resilient remodeling market, which historically performed well during economic downturns, is lagging as home-equity values continue to decline. Unlike prior downturns, we expect this trend to continue for three primary reasons:

Declining home prices are reducing existing homeowners’ equity positions, thereby reducing the amount of capital available for cash-out refinancing.
Tighter lending standards have been implemented, resulting in higher rates for home equity loans. Accordingly, we expect levels of consumer borrowing against homes to decline.
Historically, 27 percent of home equity loans extended were used to fund residential improvements. From 2003 to 2006, this increased to approximately 40 percent as homeowners took advantage of above-average home appreciation and low interest rates. In turn, we expect remodeling to remain depressed until the second quarter of 2009, reflecting a reversion to mean spending rates. This trend is already emerging, as the level of cash-out refinancings has declined the last two quarters, down 28 percent and 52 percent, respectively.

In the News

Social and environmental issues have taken center stage, especially the potential threats from climate change and natural resource scarcity. The popularity of green building has become an integral part of the construction industry. Manufacturers must now evaluate their building products on the environment level as well as their business. Early adopters are well positioned to address the growing demand for LEED-certified 'green buildings' in new construction, as well as renovation. Green facilities typically require higher upfront costs for construction; however, they afford higher rent premiums and occupancy rates and lower operating costs. According to McGraw-Hill, the value of green building construction is projected to increase to $60 billion by 2010. The education, office and healthcare segments will account for more than 80 percent of total non-residential green construction in 2008.

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