Monthly Issue
From Home Furnishing Business
January 27,
2024 by HFBusiness Staff in Business Strategy, Industry 
How Manufacturing Performed in 2023 Figure 2 summarizes the more current data from last year through October. This data highlights two time periods: (1) the first 10 months of 2023 compared to the same period in 2022, and (2) the most recent month-to-month comparison of October 2023 to September 2023 (one month). Shown are shipments, new orders, inventories, and unfilled orders for the two time periods. Also included are import numbers.
Over the last year, manufacturer’s shipments, new orders and inventories have slowed, and growth has been flat. Meanwhile over the year, unfilled orders are down 6.4%. This is against a backdrop of U.S. imports that were down 22.8% during the first 10 months of 2023 over the same time period in 2023. Data month-overmonth for the most current month (October versus September 2023) shows a similar picture with shipments and inventories down, but only slightly, and new orders up 1%. Unfilled orders growth is also flat. Meanwhile imports for October rebounded to grow 11.1% over September. Consumer spending has slowed, but for how long? And when it picks back up, will the consumer be forced to return to long wait times.” The road getting here has been interesting, with furniture manufacturers enjoying the backlog of consumer demand created during the pandemic. Table A shows that quarterly furniture and related products shipments peaked in the fourth quarter of 2022 at $20.78 billion but really began to slow in the second half of 2023, (down 2.9% by the end of the third quarter).
Along the way, U.S. manufacturers caught a break as foreign imports, Chinese in particular, struggled to keep supply chains up and running. Available data through the first three quarters of last year show foreign imports peaking at $15.4 billion in the second quarter of 2022 then ultimately falling over 30% to $11.01 billion in Q3 of 2023.
Monthly data in Table B details furniture shipments and imports December 2022 through October 2023, adding the extra month into the fourth quarter. For U.S. manufacturers, the final dip began in February of 2023 and has not yet recovered. Between January and October of last year, U.S. shipments fell 3.7%. Meanwhile, imports continued to struggle, falling 14.5% January to September last year, but rebounded 11.1% in October over September 2023.
Over the last 10 years, domestic manufacturers’ shipments of furniture and related products peaked in 2022 at $82.1 billion and are expected to be down less than ½ of 1% in 2023 (Table C).
The value of shipments began to decline in 2019 by 3.6% and fell further in 2020 by 5.8%. Shipments began to rebound in 2021 by 7.5% as shutdowns continued in China, and grew further by 8.5% in 2022. At the end of last year, domestic shipments were down 0.04% through the third quarter (Table D).
Also detailed in Table D is a comparison of the growth in manufacturers’ shipments to the growth in the producer price index for furniture 2014 to 2023 October. This graphic shows that until 2019, when inflation was low, manufacturers’ shipments grew faster than price increases/ inflation. However, the pandemic upended that trend somewhat. In 2021, when inflation surged, demand stayed high and ahead of price increases. Since that time, inflation has outpaced the growth in shipments, especially in 2023 when producer prices/inflation for furniture grew 4.5% while shipments have shown no growth October year-to-date.
Table D shows the annual dollar shipments since 2014 with preliminary estimates of $82.07 billion for 2023 yearend. Although not an exact apples-to-apples product comparison, the tables have turned for manufacturers and retailers when it comes to inventory levels. Throughout 2022 and the first half of 2023, furniture and related product manufacturers carried a much higher ratio of inventoryto-shipments compared to retailers’ inventory-to-sales ratios (furniture and home furnishings products) (Table E).
But by the summer of last year, retailers’ inventories stayed stable as manufacturers declined, with consumer demand eating into manufacturer’s inventories as imports dropped sharply. By October of last year, the ratio of inventories to dollar shipments for manufacturers was similar, 1.56X for manufacturers compared to retailers at 1.53X.
After unfilled orders increased consistently month-to-month throughout most of 2021, manufacturers began to whittle down the sizable backlog in 2022 and picked up more steam in the second half of last year. Coming out of the plant shutdowns in 2020, unfilled orders grew a total of 27.9% in 2021 and 3.8% in 2022 before going negative by 8% in the first 10 months of 2023. Table F details the reduction in unfilled orders.
In the years leading up to the pandemic (2018 – 2019), manufacturers’ monthly unfilled orders/backlog was mostly consistent at 130% of the value of shipments (ratio 1.3X). The ratio peaked in December of last year at 1.87X as unfilled orders approached double the shipment volume. In May of 2022, the backlog ratio dropped to 1.66X before popping up slightly to 1.69X in June (Table G).
New orders, the life blood of manufacturing, grew throughout 2022 finally peaking in January 2023 to a onemonth high of $7.01 billion. Then between January to July, new orders fell to $6.48 billion before rebounding in August of last year and growing monthly to $6.74 billion in October, the most available data at press time (Table H).
While manufacturers’ shipments grew consistently coming out of the Great Recession, the number of manufacturing establishments declined rapidly (Table I).
In 2011 the number of companies manufacturing furniture and related products totaled 18,985 before falling 7.2% over the next five years to a low 17,623 in 2016. A small two-year uptick that began in 2017 didn’t hold through 2019 and 2020 during the pandemic. But since 2020 the number of manufacturing establishments grew to 18,346 by 2023 Q2, an increase of 14% (Table I).
But while the number of stablishments was falling, employment was growing by 12.2% by 2012 to 2017 peaking at 93,100 employees. But by the end of 2018, employment was declining and has not recovered, even with the growth in establishments. Between the peak of 2017 and June of 2023, the most recent data, employment fell to 360,900 which is 8.2% below the 2017 peak.
Annual hourly wages for all furniture manufacturing and related product employees have increased every year over the last decade but the biggest gains were made in 2020, 2021, and 2022 growing 4.6%, 4.3%, and 4.8% respectively. In June of last year, average annual wages totaled $54,549 an increase of 1.35% over 2022. Wages last year were 39% higher than 2012. (Figure 3).
One of the major problems facing many U.S. industries is the slowing of worker productivity. And this is true as well for furniture manufacturers. (See Figure 4 for a definition.) The productivity index shown in Table K, indexed to 2015, indicates that over the seven years ending 2022, the most recent data, productivity has declined 10.5%. Meanwhile wages increased 26.8%.
In December of last year, the Feds announced that inflation was cooling and promised to reduce interest rates in several stages this year. Election years are usually stable for the economy. Yet with the turmoil of a contentious election coupled with international conflicts and a crisis deepening on our border, there could be surprises in store for the year. American Furniture manufacturers may also be sitting on pins and needles wondering if China will get its act together with imports and begin to take sizable share of the market away from U.S. manufacturers again.
December 29,
2023 by HFBusiness Staff in Business Strategy, Industry
Gen Xers households (ages 42 to 57) averaged $1,014 in furniture expenditures in 2022 followed by $770 for Millennials, $679 for Baby Boomers and $430 for Gen Z (adults 25 and under) (Table B). Our 2023 consumer spending article will focus on these generational households, quantify their spending and shed some light on what may be ahead for the furniture industry. A future article will look at each generation’s shopping choices and outlets and explore how each furniture channel can attract them to theirs.
In preparing this article, we have borrowed a quote from the Pew Research Center, a leader in generational studies, which says, “Generational signals can sometimes be lasting, but youth itself is not a permanent state.
Generational Influences Generational spending is sometimes a difficult concept to grasp as it follows the same groups through time who shared similar economic, domestic and world events during their coming of age. Generations get older together with the shared experiences and events shaping them throughout life. This approach is opposite to the traditional method of analyzing spending, and that is by looking at age and income at a moment in time. For example, traditionally, one might ask how much were 35- to 44-year-olds with incomes between $50,000 - $70,000 spending 15 years ago compared to today. In this example, the age group would have been from two different generations. The shared generational experiences can be wars, economic recessions, terrorist attacks, pandemics, medical discoveries, (i.e., birth control pills) or technological advancements, like the personal computer, cellphones or the Internet. Usually, the beginning of a generational identity (birth year) often begins with the adoption of a new technology.
Figure 1 gives an overview of each generational cohort and the cultural experiences and events that influenced them.
Demographics Millennials (ages 26 to 41) are now the largest generation alive numbering 72.3 million, which is 21.7% of the population and 27.7% of adults 18 and over (Figure 2). Immigration is expected to swell their ranks further. But not all Millennials have formed households, and are thus second to the Baby Boomers (ages 58 to 76) in consumer units/households. Boomers comprise 26.3% of the population 18 and over and are still the largest group of households at 32.4%. The smaller generation sandwiched between Baby Boomer and Millennials, Generation X (ages 42 to 57), represents 25.1% of the population over 18 and over 27% of households. Younger Generation Z (ages 10 to 25) comprise only 5.5% of consumer units, but their ranks will grow rapidly as more age into adulthood. Figure 2 shows the demographic detail followed by Table C which compares percent of adult population versus consumer units.
The growth rates in household formations for each generation prepandemic (2019) and post-pandemic (2022) were varied (Table D). Before the pandemic, very few Gen Zers (ages 10 to 25 in 2022) were out of college. But between 2019 and 2002, their numbers almost doubled. Millennial households (ages 26 to 41 in 2022) grew 5.7% over three years, which is a significant amount considering their already large numbers before the pandemic. Generation X (ages 42 to 57) grew less than 2% over the three-year period, and Baby Boomers less than 1%. The toll the pandemic took on the Silent Generation was wide spread with households declining 27.7% 2019 to 2022.
Income by Generation Generation X (ages 42 to 57) has by far the highest incomes averaging $126,892 per households in 2022, followed by Millennials (ages 26 to 41) at $100,315 and Baby Boomers (ages 58 to 76), $81,827 (Table E). But the higher the income bracket, the higher the taxes paid. In this case, Gen Xers paid 16.8% of income in taxes, Millennials 11.9%, Baby Boomers 11.6%, and young Gen Zers just starting out 5.3%.
One of the outcomes of the pandemic, was the explosion of incomes in the midst of a very tight labor market (Figure 3). Pandemic monetary assistance was also a factor. Millennials that had been crying the blues were all of a sudden getting higher paying jobs. Salaries for Millennials (ages 26 to 41 in 2022) who were three years older in 2022 than 2019, grew 27%. For Generation X (ages 42 to 57 in 2022) salaries grew 19.4%. Baby Boomer income rose only slightly by 1.2%. The average Gen Xer (ages 42 to 57) had 21.1% more disposable income than the average Millennial (ages 26 to 41) and 48.6% more than the average Baby Boomer.
Expenditures by Generation
So how did the different generations spend their money in 2022? With Gen Xers (ages 42 to 57) having the highest incomes, they in turn spent the most, $91,382, followed by Millennials at $74,782, and Baby Boomers averaging $66,362. Newly forming households by adult Gen Zer households (25 and under) spent on average $47,975 (Table B and Figure 4).
For all consumers, over one-third of their expenditures was spent on their homes, which included paying for the actual structure (rent/mortgage), utilities, household furnishings and equipment (including furniture), and household operation and supplies. And even though Gen Xers (ages 42 to 57) still spent more actual dollars on average on household furnishings and equipment, as a percent of their total spending, this generation also spent the lowest at 31.2%. The general rule for spending on the actual housing structure, either rent or mortgage payments, property taxes, etc., was that the younger the generation, the higher percentage of expenditures on basic housing. For example, Generation Z (adult ages 25 and under) averaged 25% of expenditures for rent or mortgages, Millennials 21.6%, Generation X 18.6%, and Baby Boomers 18.8%. However, the opposite was true for utilities. The younger the generation, the less they paid as a percent of expenditures. The same applies for household furnishing and equipment. Baby Boomers spent more of their income, 3.9%, on household furnishings. Figure 4 shows the total percentages of expenditures, including transportation, housing, food, healthcare, entertainment, education, and contribution to retirement accounts.
Household Furnishing and Equipment
Like many other consumer products, spending on household furnishings and equipment grew rapidly between 2019 through 2022. This category includes furniture, floor coverings, major appliances, small appliances/miscellaneous housewares, household textiles, and miscellaneous household equipment. Spending by Generation X (ages 42 to 57) for household furnishings totaled $3,355 on average per household (Figure 5), which was over 30% more than Millennials or Baby Boomers. In fact, Gen Xers (ages 42 to 57) outspent Millennials and Boomers in every household furnishing product area, except small appliances and miscellaneous housewares, and that difference was very small.
Table F shows the dominance of Generation X in household furnishings spending. In average household spending on furniture, Gen Xers outspent Millennials by 31.7% and Baby Boomers by a significant 49.3%. For major appliances, the difference was less than 20%. In the popular household textiles category, Gen Xers (42 to 57) outspent Millennials by 96.1% and Baby Boomers by 54.2%
In 2019 just before the pandemic, Gen Xers (ages 42 to 57) were leading all other generations in spending on household furnishings, but not by a lot compared to Millennials (ages 26 to 41) (Table G). But throughout the pandemic and beyond, the Gen Xer gap widened significantly. Bear in mind that all generations were three years younger in 2019.
Furniture Expenditures
Coming out of 2019, furniture sales were increasing across all generations but some took different sending paths in the immediate pandemic of 2020. Table H graphically shows the spending, while Figure 6 presents the detail. In 2020, during the worst of Covid fears, spending cooled among Generation X (ages 42 to 57) to 3.4% and more so with Baby Boomers where furniture spending was down 13% for the average household. All the while, younger generations, Millennials and Gen Zers (25 and under) were posting doubledigit increases in furniture spending in 2020 as pandemic money flowed in and a moratorium was placed on student loans. The spending craze for Generation Z (25 and under) and Millennials (ages 26 to 41) continued through 2021, and then slowed in 2022 as inflation set in. Gen Xers (ages 42 to 57) and Baby Boomers were a different story. While conservative during the heart of the pandemic in 2020, in 2021 and continuing through last year spending grew over 35% in 2021 and over 11% in 2022 for both Gen Xers and Baby Boomers.
As shown in Table I, when it came to buying furniture, in 2022, the average Generation X (ages 42 to 57) household outspent Millennial households by 31.7% and Baby Boomers by 49.3%.
Gen Xers (ages 42 to 57) will continue to dominate the furniture industry through 2025 as their affluence continues to grow. Some older Gen Xers are inheriting money from the quickly declining Silent Generation parents. However, Millennials will get the biggest boost for years to come inheriting billions from their Baby Boomer parents. Younger Generation Z (under 25) is also bursting on the scene, better educated, more ambitious and some say learning from the mistakes of Millennials.
A future installment of Stat Speaking will explore where they are spending their money, and how each furniture and home furnishings channel can lure them their way.
July 28,
2023 by HFBusiness Staff in Business Strategy, Industry
This article comes on the heels of last month’s installment of Statistically Speaking entitled, “Furniture and Home Furnishings Stores Face Marketing Challenges” and addresses employment and wages in retail brick and mortar distribution channels that serve the furniture industry.
Where Have the Workers Gone?
Retail companies add employees when demand dictates. An interesting statistic, and perhaps a key one for brick-and-mortar furniture distribution channels, is that since 2017, most retail store types decreased in number of employees, especially retailers whose main product line is furniture and home furnishings (Figure 1). In other words, the highest year of employment was back in 2017. eCommerce growth is no doubt a significant part of the reason. Furniture store employment, however, fell only 3.1% during this period, the best performance of the “2017 highest employment” groups featured in Figure 1.
The stores that did add employees throughout the pandemic and beyond were home centers and other building material dealers, up 4.2% in workers 2017 to 2023 Q1, with employment peaking in 2021. Other retail outlets gaining employees were warehouse clubs and superstores, up 9.7% and still growing through 2022, and lawn and garden equipment retailers, increasing 13.0%. These retailers that are still growing reflect the cultural attitude prevalent during the pandemic as consumers began to place greater importance on their homes and purchased accordingly.
One key shift that has occurred among the workforce is that the ratio of workers in the total workforce that are in supervisory or non-production roles has grown over the last four-plus years compared to the decline in the percent of production workers and NONsupervisory employees (Tables C-1 and C-2). The ratio for the total retail trade has remained stable at 14.9% in both categories, but in most all furniture distribution categories the percent of the workforce that is now in supervisory or non-production jobs has grown. For furniture retailers, in 2019 Q1 17.2% of employees were considered supervisory or non-production, compared to 19.3% in 2023 Q1.
Tables D-1 and D-2, show that the decline in employees is caused by a decrease in production and non-supervisory workers, while supervisory and non-production workers increased for most retail store types. The production/non-supervisory category declined 5.7% for furniture retailers and 15.6% for home furnishings stores.
Table D-2 shows that among the other retail store types, home centers, paint, wallpaper and other building material dealers showed a more stable employee mix between the two categories, with production/non-supervisory employees declining 1.0% in number, and supervisory/non-production workers falling 1.6%. This retail outlet had the lowest total employees decline of 1.1%.
Wage Increases
Among the various furniture and home furnishings retail distribution outlets, floor covering retailers have the highest hourly wages at an average of $32.69 (2023 Q1) followed by electronics and appliances at $27.38 (Figure 2). Furniture stores and home furnishings stores are next at $26.36 per hour and $26.33 per hour. General merchandise retailers, which broadly includes warehouse clubs, superstores, department stores, and other general merchandise retailers, averaged $21.03 per hour. Home centers average $22.04 and hardware retailers, $21.69. The combined average hourly wage for all employees in the U.S. retail trade in all product areas in 2023 Q1 was $23.72. Figure 2 also highlights the vast difference in the growth of wages since 2019 and throughout the pandemic and inflationary period. The highest hourly wage growth was among floor covering retailers of 27.28% 2019 Q1 to 2023 Q1, far outpacing inflation, followed by home furnishings stores at 22.38% and furniture stores at 18.19%. The lowest hourly wage growth 2019 Q1 to 2023 Q1 was among electronics and appliances stores at 3.76%.
Of note is that hourly wages of furniture retailer employees declined 3.6% in 2023 Q1 over the prior 2022 Q4, the highest decline of all distribution channels (Figure 2). All other distribution channels showed increases, except furniture retailers and floor covering stores.
The wage growth of these distribution channels during the two years prior to the pandemic and through 2023 Q1 shown in Tables E-1 and E-2, contrast the differences in the average hourly wages. Table E-1 shows average hourly wage for the primary brick and mortar distribution channels 2018 through 2023 Q1. Note the significantly higher wages of floor covering stores followed by furniture/home furnishings stores.
Table E-2 graphic shows the other distribution channels where furniture/ home furnishings are not the primary product categories. The higher wages for electronics and appliances retailers stand out in this graphic.
In the desperate search to hire and maintain production and non-supervisory employees for many retail store types, including furniture stores, the rate of hourly wage growth was higher for these workers than for supervisory and nonproduction employees (Figure 3). Hourly wages for production and non-supervisory employees grew 24.1% between 2019Q1 and 2023Q1 for furniture stores compared to total retail trade employee hourly wage growth 20.4%. For home centers, paint, wallpaper, and other building material dealers, hourly wages for production and nonsupervisory employees skyrocketed 44.8%.
As discussed previously, most of the salary growth among retail employees has been mitigated by inflation. So, the final question to be answered is: If hourly wages grew faster than inflation, why did weekly wages struggle to keep up with inflation. Part of the answer is that employees worked fewer hours through 2021 and 2022 as inflation soared. The lost hours are not dramatic, but they add up (Figure 4). For many retail store types, the average employee works fewer than 30 hours a week. The maximum average weekly hours for any of the retail channels discussed in this article is 35.4 in floor covering stores. With inflation ebbing, where are we now? Fewer workers, with higher wages, and working less hours than ever before.
March 27,
2023 by HFBusiness Staff in Business Strategy, Industry
The strategy of traditional furniture stores to market to homeowners has been attractive because, after all, homeowner households outnumber rental households by about 1.8X, not quite double, and that ratio hasn’t moved much in the last few years. However, during the pandemic and since, some of the reasons this ratio has stayed stagnant have started to change (see Figure 1. Apartments Begin to Have Greater Appeal).
It is estimated, based on housing units already started, that over 450,000 new apartments will be completed in the first three quarters of this year, more than 100,000 units than last year. This represents an increase of 30%+ over the first three quarters of last year. Meanwhile single-family housing starts slowed over the last months, and new homes scheduled to be finished in the first three quarters of this year are estimated to be 20% less than the same period last year (Figure 2).
The demographics, psychographics and economics of apartment living may all be aligning at just the right time with the builders starting to address the pent-up demand for apartments. Traditional furniture stores and other furniture retailers may want to take another look at the special furniture needs and style preferences of apartment renters and how best to market to them. The last installment of Statistically Speaking began a two-part series on the housing industry – homeowners and renters. This issue addresses the growth in apartment construction and the opportunities for furniture retailers to target marketing efforts to these young, mobile, renters.
Age and Income Demographics
In 2021 there were over 128.5 million occupied housing units, according to the U.S. Census Bureau’s American Housing Survey (AHS). (Note: The AHS is sponsored by the Department of Housing and Urban Development (HUD) and conducted every other odd year by the U.S. Census Bureau. The survey is the most comprehensive national housing survey in the United States.) Homeowners represented 64.2% of the total in 2021 and renter households 35.8%. This ratio has been relatively stable in recent years with the race to own a home during the low interest rates of the pandemic increasing homeownership slightly. Table A compares the number of occupied housing units 2017 to 2021. In the last two years, 2019 to 2021, renter households grew 3.0% in the two years and homeowners 3.8%.
More than any other demographic, low income limits the ability of a household to make a significant furniture purchase. Table B segments total households 2017 to 2021 into three income ranges: Under $30,000 (24.6% of households in 2021), $30,000 to $99,999 (45% in 2021), and $100,000 and over (30.4% in 2021). Together, the renters and owners share the lower income households under $30,000 households -- 53% renters and 47% owners. On the other end of the economic spectrum, homeowners account for 82% of the 38.2 million households with annual incomes $100,000 and over. Between the low end and the more affluent end lies the broad range of $30,000 to $99,999 households totaling 45% of all units, where growth in apartment living is thriving (Tables B). It should be noted that the $100,000 and over group has benefited from post-pandemic growth in incomes, with the other broad categories declining since 2017.
A significant portion of each tenure type, renter or owner, is comprised of households with total income less than $30,000. Research has shown these households not to be significant purchasers of furniture. Table C gives a picture of more detailed income ranges shown in millions of homeowners. Zeroing in on key apartment furniture purchasers, Table D details percent of renter households compared to owners since 2015, excluding households with income less than $30,000. The data shows that the percent of households in the two upper income groups, over $80,000 to $99,900 and $100,000 and over, have been growing for both owner and renter housing units. Adding the perspective of age, the largest segment of households continues to be the 55 to 64 group as Baby Boomers age out of this group (Table E). They are 25.6 million strong and controlled by homeowners, 74.1% owners to 25.9% renters. As would be expected, renters dominate the 25-to-34-year-old age group 60.4% to 39.6% and control a significant portion of the 35-to-44 year olds, 41% renters to 59% homeowners. According to the National Association of Realtors, in 2021 the typical age of a first-time homebuyer was 33 and last year rose to 36.
Mapping the income of households to their householder ages brings the opportunities for furniture marketing to apartment dwellers into focus. Figure 4 shows the ratio of renter households to owners, with the highlighted areas indicating primary furniture purchasing segments where renter households outnumber homeowners. Profiles that reflect more renters than owners include ages 25 to 44 with incomes $30,000 to $99,999 and ages 45 to 54 years with incomes $30,000 to $79,999. (Note: Households with annual income under $30,000 as well as all ages under 25 years are not included in this analysis as they are not considered significant purchasers of home furniture.) Renters outpace homeowners in four key age/income ranges (Figure 3):
This profiled age/income segments where renters began to outnumber and grow faster than owners began between 2013 and 2015 (Table F). But since that time, even with tight apartment inventories and a pandemic, the number of renters in these middle-income ranges out surpassed the number of owners, increasing in 2021 to 12.1 million housing units (renters) compared to 8.2 million owners.
The remaining demographic comparison relates to composition of renter versus owner households (Figure 5). Renter households tend to be a combination of single individuals, either living alone, 38.3% of renters versus 22.9% of owners, or single and living with other adults or children, 36% renters versus 18.2% owners. Married couples with or without children tend to be homeowners, 25.7% of renters compared to 58.9% of owners. Interestingly, the percentage of households with children tends to be similar among renters and owners, 29.5% of renters versus 29.2% of owners.
Marketing to Renters
According to the U.S. Census Bureau, the typical U.S. renter is 39 years old, has never been married, with at least 4-years of college education, and a median annual income of $42,500 (the national median annual income is $67,500). Within our profiled furniture-targeted renters (see Figure 2 profile), median household incomes are higher between $60,000 and $69,999, with many single, one-person households. Owners within this same profile show median household incomes of $80,000 to $89,999.
With renters significantly younger than owners within the same income groups (Figure 6), marketing requires a totally different approach, especially looking at the size and style requirements for smaller apartments versus larger homes.
The typical rental is a 2-bedroom apartment with 1.5 baths and an area between 1,000 and 1,999 square feet (500- 999 square feet for most recent renters) (Zillow).
Historically, monthly mortgage payments are higher than rents, but as demand has exceeded supply for apartments, that gap has narrowed. According to Business Insider, in 2022 the average mortgage payment nationwide was $2,064 on a 30-year fixed mortgage while average rent for a 2-bedroom apartment had grown to $2,048, a difference of only $12 (Rent.com). Comparing that same apartment rent to a 15-year fixed mortgage of $3,059 on average, the difference is more significant at $1,011 a month.
Location, Location
Another key element of marketing to renters is location. Numbers of renters versus home owners as well as age and income can vary significantly, depending on the market. Bear in mind that while home values have skyrocketed, so have rents. Realtor.com reports that New York, California and Massachusetts are the most expensive states in which to rent, and yet home prices are also much higher, making renting more attractive in some metro areas. They report the top 10 U.S. cities where the gap between rent and mortgage is most attractive for renters (Figure 7) with San Francisco, San Jose and New York city heading the list.
The metro areas where buying is cheaper than renting are scattered in the South and Midwest and include Pittsburgh, Birmingham, St. Louis, Cleveland, Baltimore, Louisville, Indianapolis, and Kansas City. The costs of renting vs. buying in these areas are less significant, between $12-522 a month, in favor of buying.
Build It and They Will Come
Once construction has begun, it takes on average 17+ months to complete an apartment building and eight months to build a house. Table G shows estimated completions over the first three quarters of this year. The market for apartment furniture in these new, often billed as luxury units, will respond.
And finally, when you couple increased apartment supply with continued growth in the population of 25- to 39-year-olds and 40- to 54-year-olds over the next 10 to 15 years (Table H), then the table is set for retailers to step up to address the demand for apartment furniture.
January 19,
2023 by HFBusiness Staff in Business Strategy, Industry
The rapid increase in mortgage rates in the Fall of 2022 put what many feel was much-need pressure on the housing market to slow its pace of record price increases. However, prices have not decreased as much as expected as tight inventories have protected the industry from sharp declines. In addition, falling mortgages four weeks in a row to December 8 has not spurred demand. At press time, mortgage rates were 2X the rate in January of 2022, but home prices still 6% higher.
A correction may be ongoing, but fewer economists now suggest there will be a 2023 housing crash. Some even predict that slightly declining mortgage rates beginning in November may suggest the housing industry has weathered the worst of it. How long the correction will last is in large part in the hands of the Fed and whether additional rate increases are forthcoming. Current, existing home owners are sitting tight. Also, there is another wrench in the new housing crisis and subsequent recovery. New household formations are now accelerating while housing supply remains near historic lows, with not enough new construction in the pipeline.
All of these housing factors and their impact on the furniture industry are examined in more detail in this insallment of Statistically Speaking. Each housing factor discussed is divided into two sections – (1) the current situation, and (2) the future drivers going forward.
Mortgage Rates
Current Situation. In the first week in January of 2022, a 30-year fixed rate was at 3.22% and a 5/1 ARM 2.41%. Eleven months later, the fixed rate had more than doubled to 7.08% and the 5/1 ARM had jumped more to 6.06% (Table A). Since that height last November, mortgage rates have continued to drop four straight weeks (at press time) almost three-quarters of a point, the largest decline since 2008. Last December 8, a 30-year fixed rate dropped to 6.33%. Since November 11, the rate for 5/1 ARM exceeded the 30-year fixed and has no longer become attractive.
Future Drivers. While the decline in rates has been large, according to Freddie Mac, “homebuyer sentiment remains low with no major positive reaction in purchase demand to these lower rates.” Interest rates have priced many homebuyers out of the market. Couple that with inflation and economic fears, and homebuyers have chosen to sit this one out for a while.
New and Existing Home Sales Current Situation. The surge in home sales that began during the pandemic and continued through 2021 peaked in January 2022 at a combined 7.3 million new and existing units (annualized). Both new home sales and existing homes sales have been in free fall since then. During the first nine months of last year through October, the most current data at press time, new home sales fell 23.9% and existing home sales were down 31.7% (Table B). Low inventories and declining pending homes sales data suggest November and December continued the trend.
Future Drivers. Besides the stability of mortgage rates, the key drivers for housing demand going forward include, among others, new household formations, consumer confidence, the affordability of housing, and new construction on the horizon, which is examined in more detail later in this article.
Home Prices
Current Situation. Housing prices, both new and existing homes sold, have been skyrocketing, especially since 2019. The annual median price of a new home increased 41.1% between 2019 and October 2022 YTD while existing home prices grew 42.2% during the same period. (Table C). Despite falling home sales throughout the summer, prices continued to grow, but softened for existing home sales with rising interest rates. New home prices slowed briefly with the impact of higher rates, but the median price of a new home in October was still $493,000, a new record. This price was 8.2% above the prior month of September following a two-month slump after recession fears surfaced in the media and larger interest rate increases became evident. October new home sales prices were also up 15.4% over October 2021. Meanwhile, the median price of existing homes sold fell in October for the fourth straight month from its peak in June of last year. October's median existing home price of $379,100 was 8.4% below June's record of $413,000.
Future Drivers. Low inventories should keep prices from falling significantly, especially if interest rates stabilize. More importantly will be whether the economy responds to anti-recessionary efforts by the Fed.
Housing Inventories Current Situation. Low housing inventories have been a hot topic over the last three years as one of the prime drivers of increasing home and rent prices. During the buying frenzy beginning in 2020 through October of last year, inventories for housing units for sale dropped 56.7% and available rental units declined 16.3% (Table D). But as housing demand has slowed in recent months, months’ supply of inventory has increased as this factors into available inventory and current demand, which has been low.
Future Drivers. New construction of homes and apartments and slower demand are the two key drivers of inventory levels and also key to easing the housing price wars. Unfortunately, in 2023, especially in housing units for sale, current housing starts don’t appear to be high enough to appreciably impact inventory without a sharp decline in demand.
Housing Construction Permits and Starts
Current Situation. It takes a while to permit, start, and complete a new home or condo (seven or eight months per the Census Bureau). And an apartment building takes well over 1-1/2 years (17.5 months per the National Association of Home Builders). The length of the process provides a unique window into the future inventory of new homes and apartments.
For single-family homes and condos, building permits were issued in a frenzy and new units started beginning in the summer of 2020 and peaked at the end of 2022. About 50% of building units permitted are started within the same month and 90% are underway within two months. Therefore, housing and apartment starts track closely alongside permits. Single family starts peaked in the winter at the end of 2020 at 1.3 million annualized units but were down to 855,000 starts by October of last year. Total starts for the first nine months of 2022 were down 6.6% over 2021. Meanwhile, multi-family apartment starts stayed strong at 612,000 last April (Table E). Year-over-year October 2022 YTD total average multifamily unit starts are up 17.5%. Future Drivers. Home and apartment builders, much more so than existing home sellers, have to look into their crystal balls as the housing demand landscape may have changed by the time a project is started to completion. Understanding changing demographics is essential to the planning that goes into building, especially since the pandemic. For example, is there a trend toward moving out of the city and into the suburbs? Or, what is the affordability picture for younger households? No matter the current consumer demand, mortgage rate or inflation rate today, new home and apartment inventories were set in stone months ago for new homes and much earlier for apartments.
Housing Completions
Current Situation. With the flurry of building in 2020 and early 2021, new homes and condo completions remained strong in most of 2022 through September and then began to decline, as economic uncertainty set in (Table F). New homes were completed in the first nine months of 2022 at an average annualized rate of 1 million, which was 5.3% higher than the first nine months of 2021. Meanwhile multi-family completions, which had begun construction over 1-1/2 years prior, slowed slightly in 2022 to an average annualized rate of 343,000 for the first nine months, down 6.5% compared to the first nine months of 2021.
Future Drivers. Table F also shows estimated new home completions through the first six months of 2023 based on what is already in the pipeline, and the picture is not pretty. Based on starts seven to eight months prior, new home completions in the first six months of this year are estimated to decline a total of 26% in annualized units.
Multi-family units will pick up some of the slack in housing as there will be more apartment units built this year since the mid1980s (Table F). Buildings begun over 1-1/2 years ago, should come online growing an estimated 33% in total annualized units over the first six months of this year compared to 2022. The second half of this year could bring another 24% growth in units over the first half of 2023. With the high number of apartment completions coming this year, the furniture industry has an opportunity not seen in years, to market apartment-suited home furnishings, especially to the 25 to 39 year age group, which is growing rapidly.
Regional Outlook
The one-year growth in housing starts by region gives us a glimpse of what we might see in the months ahead for new houses and the longer future of multi-family apartment buildings. Compared to the first nine months of 2021, total new home starts were down 6.6% and multi-family starts were up 17.5%. One-year growth for new home starts declined in all regions, with the Northeast dropping the most by 15.6%. The Midwest was down 6.3% in one-year new home starts with the South declining 5.1% and the West 8.0%. All regions posted very good growth in multi-family apartment building starts during the same period, except for the West which was up only 2.7% for the first nine months of 2022 compared to 2021 (Table G).
Household Formations
Current Situation. The population has been growing for many years in the 25 to 39 age group as Millennials flooded into adulthood. However, numbers have been declining for the 40 to 54 group, the households in their prime earning years. Last year there were 7.5 million more people in the younger Millennial age group than the older adults (Table H). The Census Bureau is also reporting unexpected growth in new households coming out of the pandemic for younger adults.
Future Drivers. According to the Census Bureau, the demographics will change dramatically over the next 10 years impacting the housing and furniture needs of households under 55 in ways not seen since the Baby Boomers came on the scene. In 10 years, it is estimated the total population ages 25 to 54 will grow by 8.9 million, and almost half will be in their prime furniture buying years by then. This explosion of households will be the subject of an upcoming issue of Statistically Speaking.
