Steel framers looking to take a bigger bite out of the residential construction market might have to curb their appetite as the sector shows no sign of rebounding and home builders continue to slash costs.
Analysts aren't expecting the market to turn around anytime soon, and double-digit drops in housing starts are expected next year on top of the collapse in this year's starts.
U.S. housing starts and building permits unexpectedly rose in June, according to U.S. Census Bureau data, but the increase was mainly due to a recent change in New York City's building code, which substantially drove up starts and permits for multifamily dwellings in the Northeast.
Housing starts jumped 9.1 percent to a seasonally adjusted annual rate of nearly 1.07 million, while permits increased 11.6 percent to a little over 1.09 million, marking the largest increase since January 1990. Economists had forecast that permits would fall to an annual rate of 961,000.
But when the New York City code change was removed from the figures, housing starts actually fell by 4 percent and building permits nudged up only 0.7 percent.
And the market still hasn't seen the bottom.
Robert P. Curran, managing director of housing at Fitch Ratings Ltd., New York, forecasts that housing starts will fall about 29.5 percent this year and another 8 to 10 percent next year.
"This year, in terms of new home starts and sales of existing homes, we're going to see large percentage declines. The most likely (outlook) at this stage is further declines next year, but not as pronounced. However, we will still see low double-digits in those kind of metrics next year," he said.
With the market still in a state of flux following the meltdown in the sub-prime mortgage sector, attempts by the steel framing industry to make inroads into the single-family home market dominated by conventional "stick frame" or "platform frame" construction using standardized dimensional lumber have hit a roadblock.
A combination of softening demand for new homes and national and regional home builders cutting costs makes selling into the market ever more difficult. "In the end, it's motivated by price," Curran said. "To whatever degree there has been penetration, they (steel framers) probably lost ground because of the consequence of the steady rise in steel prices. Lumber prices have been generally moving down over the last couple of years. They're down so far this year, so that's going to impact the competitiveness of steel vs. wood." Framing lumber prices are down about 10 to 10.5 percent currently compared with a year ago, he added.
Meanwhile, hot-rolled and cold-rolled steel prices have risen dramatically this year due to the weaker dollar discouraging steel imports, forcing more consumers to source material domestically. U.S. steel producers also are competing more in the export market.
U.S. prices for hot-rolled sheet have more than doubled in the past year to about $54 per hundredweight ($1,080 per ton) as of early August from the same time last year. Likewise, cold-rolled sheet has seen a dramatic shift upward, nearly doubling from year-ago levels to $58 per cwt ($1,160 per ton).
Steel frame companies also continue to battle the fixed mindset of home builders who use wood because of their familiarity with the product, despite steel framing having some considerable advantages, notably in strength and ease of construction, proponents claim.
But in the current climate, price is key, analysts say.
Credit Suisse analyst Daniel Oppenheim agreed that the rising price of steel would be a key factor that home builders would consider when looking at construction methods.
"House builders are doing everything they can to reduce costs. Dismal would be a generous assessment of the market right now. We will probably see a 10- to 20-percent decline again next year, depending on several factors, like financing from banks," he said. "Volume is down, so it's going to affect suppliers. There's such an extreme focus on costs."
Steel framing has managed to corner certain sectors and geographical areas of the market, such as Hawaii—where strict building codes require structural stability, particularly in the coastal areas, and resistance to termites.
But despite the strides made thus far, analysts agree that the momentum toward steel is now slowing because of soaring metal prices and the impact of the slowdown on home builders' bottom lines.
"Steel was certainly starting to become more accepted, particularly in some geographical locations where strength and coolness were often big considerations," one building materials analyst said. "But this shift has slowed, mainly because of the cost implications. House builders are trying to trim costs wherever they can just to survive this downturn, and it won't stop for some time to come. This is bad news for all suppliers."