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How the Housing Sector Has Been Impacted by the Economic Slowdown

2020-04-21

In this episode, Terry Hagerty, co-head of homebuilding & building products investment banking for Goldman Sachs, discusses how COVID-19 has impacted the outlook for housing and the broader building products sector. Despite the severity of the current slowdown, Hagerty points to favorable demographic tailwinds as reasons to expect a return to industry growth into 2021. Additionally, Hagerty explains why the sector may be poised to rebound more quickly from this crisis than that of 2008, driven by more favorable supply/demand dynamics, consumers’ relatively strong financial position, and healthy corporate balance sheets. “When I look at the balance sheets and liquidity positions of my clients, both in home building and building products, it’s quite strong,” Hagerty says. “Most of them have access to the capital markets, given some of the Fed action that we’ve seen, and generally they’re all positioned to weather what could potentially be a very extended downturn. So the outlook today is much different than 2008.”

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges. Goal is actually discussed at all and strongly shaping markets industries in the global economy objects. You are global headquarters vacations. Yet for today's gases, Terry Hire, you colleagues, are building products and home building practice in the Knesset banking division. The question today is how Coordinating an impact on the outlook for housing and the broader building products directive, Jerry thanks for joining us today, they say, must strike a trade to speak. So tell me for your dress, the current crisis and covered nineteen you talk to a lot of seals. What was he thinking coming into this year and what will the exciting and twenty twenty is? A good question When I talk to my c o clients in late two thousand ninety, they were very optimistic about two thousand. Why there's a number of reasons for this? The first is
supply and demand dynamic in the sector. So, on the demand side, there's been a lot of conversations about the millennial generation, their extended adolescents, the fact that they ve been delaying family formation and delaying buying homes. one of my favorite statistics is that the media and age were homebuyers. Nineteen. Eighty five, thirty two and stay there. Sport. He said that said we were really starting to see that trend change and the Millennia homebuyers was emerging. Now generation, which is seventy million Americans age. Twenty to forty he's entering an age band were Newton. Equally see homeownership move from from thirty percent or like sixty five percent and housing that'd be a very significant and long term tell when going in the two thousand Y all night. demand was a real limit in the supply
builders have really been under building Hawkins since the financial crisis, and we expect it to drive the construction of a number of new homes, a secondary dynamic. There is that the age of homes has increased to about forty years and indeed environment, you typically see repair or model spending, folks reviewing their kitchens, their debts, their bathrooms really spike, and that can be very beneficial to the building products. Manufacturers who sell into those and market. Obviously, Nothing is the same since the impact of global ninety what happened in this sector, particularly in how's. That outlook that you describe an optimistic gallo changed shore, so we'll cover nineteen is dramatically impact it really every and market and construction is no different, the positive side construction has been deemed essential in many states.
Beth said new homes and expensive repair and remodel expenditure, our discretionary consumer products and then environment, where the economic outlook is very uncertain that is going to slow. We really saw the first data point. It was trading this with the March new home starts, which were down One per cent, and what makes it particularly jarring is the fact that the first two weeks of March were actually a positive too? We expect the April down to be worse than sad are out for the sector. Overall, many of the demographic tell whence I talked about at the beginning of the court are still in place. and therefore, while we expect there to be a pause in construction of nineteen hasn't fundamentally changed that sector, and because of that, we expect new homes starts to return two thousand ninety levels at some point during two thousand twenty one now make a similar comment for the broader construction industry, as well.
I see the equity markets, this sector's new totally challenged basically home Ilusha down on average about fifty percent of the product manufacturers down thirty five percent or investors. Thinking about this sector right now and in how they weighing the equity, our it is. a question and that we are all human and we're all subject to some recently by us, and I think folks are looking at two thousand eight approximated in equity, market performance and financial performance of the sector to be similar to what they saw. Then I will say the environment. It is much different from my perspective. For a couple of reasons, one, The supply and demand dynamic that I described earlier. If you remember back, the two thousand eight, the two thousand crisis was largely caused by an said, Babo and frankly, over supply of house. That's not the case that the housing
supply is quite love. Additionally, the consumer is not much better position today than they were going in two thousand. The household debt to GDP ratio in two thousand and eight was about eighty percent today, is more like sixty five percent sweeping that looks a lot better overall in terms of the consumer's ability to really leaning on both housing and repair miles spending going power. I think the last point, which might be the most important point, is an island. the balance sheets and look very positions of my eyes both in holding and Dolly products is quite strong, they most of them still have access to the capital markets, given some of the fat action that big scene and generally their opposition to whether what could be a potentially very extended downturn. So the. what today is much, different and while folks are naturally lead to two thousand aid as a comparable. I do think, at least as relates to construction. Things are much different today.
So there's always in Washington, talk of infrastructure bills and dinner seem to go anywhere, but the crisis seems to have a little new impetus towards by partisan cooperation on things that might stimulate the economy. Infrastructure deal out this sector, so an ancient fracture Bilbil would certainly be helpful for construction overall, and I agree with you- there is by pardon substance, support right now for the concept I will say in infrastructure. Bell is a bit complicated in terms of how the funds are you structure it and what the dynamic is between more urban states and more world states, and action year, Bridget Glittery polarized electioneer, we forget likely. We see the structure by all before the two thousand twenty election. That say We are becoming more and more optimistic that you'll see some sort of infrastructure spending bill. Two thousand white boy. The crisis is actually put a lot of things on hold, including anais our people in the sector. Thinking and what are they focused on given the lack of ideal activity? Europe.
Emanate is really going on pause and this has been a sector where there's been a lot of active diedre by private equity, driven, consolidation in key product categories and some of the larger, more diversified players reorganising their portfolio, whether it be a spin offs, are, did ass teachers and things are really on pause and when I talk to my clients, I'd say were: were there really focus? Is the safety often wellness of their employer dates, and I actually think this has been an under reported story. I hear this the private conversations I have with clients, and if you read through their earnings transcripts over the past month, or so, it's really the focus A good example is the north, which is one of the country's artist home dollars. They were in earnings on March nineteen with anything then was really peak uncertainty in terms of the outlook. It aspires setup, yes M P bottom a few days later, and that call always was sixty percent focused on their employees. Twenty,
Think seals are laser focused on one ensuring the safety of boats that are in factories there on job sites and to making sure that there are ways are ready to go if the result of written in here so imagine private equity is the experience with the sector and the renewed interest. How might play out in change going forward, so bright, equally returns that only products space had been very strong over the past ten years, not attracted more and more funds to focus on the sector. I will say fundamental to private equity are financing markets where they can put signalling leverage on businesses and, while in the current environment Investment greater high yield markets are very open to too well known corporate issuers. I think it's gonna take a bit more time before private equity firms can really tat the leverage markets for what I'll call more p.
Style financing transaction so that I do not expect to be near turn this into cited. As you know, on activism, given the major decline and stop prices do expect to see activists pick up in the inner space. So when I talk to my clients about, activism might typically remind them that active is fundamental first and foremost, our deep value investors, so an environment where there's a lot of stock Christ, s location there is inherently more essential for activism, because there's more embedded outside in those stock prices, that's in this environment is a bit different. One activists themselves civility challenged other way everyone's portfolio. It's been challenge in terms of performance and to this is a health crisis, more than eight a financial, prices. And I you think, there's a perception that his accurate than any sort of activists, agitation against the management team in the current environment would be exceptionally tone deaf to what they're really focused on, which is the worthy and and the safety of their points so well
terrorism will certainly come in the wake of this crisis. It always does. I do not see much activism your term until we have more visibility in terms, when this crisis will begin to slow. So you mention early on that. We were on across the sea a little bit of a change in millennium habits in terms of all. By expected, any changes, commanders crisis, longer term difference in those trends. I do and an embryo point back to two thousand aid. In two thousand, I saw a large number of Americans. decide that no, maybe borrowing a bunch of money and buying a house is not the best invest. I think you may see the opposite effect this time around. What I mean by that is, there is a view that this could be the catalyst that Russia is a large number of millennials out of the city centres, the suburbs at night,
An additional accelerant of that trend is going to be the fact that working from home has become easier and more accepted and therefore being in a city centre, is less relevant. I will said the other trend. I expect to see a more on the repair. The rebuttal side, you got a large number of folks were spending more time in their homes than they ever use them and then looking around and what they don't like what they may want to improve twice. The real spiten remodeling spending coming out of this crisis made a pick one year, the home, where that would be particularly at you. I think is going to the outdoor living expenditure because a place that was already growing a bit more than overall repair remarks to another trend, as the crisis was that we are seeing smartphones, more technology and innovation in the building sector in the home we that continue as a result of the crisis, or maybe the accelerated
I do think is going to continue and I think you're right it could even accelerate the wheat when you look across industrial and markets, the real you What is the aim we ve seen over the past twenty years has been increased technology that he could use your own car, that's probably domestics and which incremental technologies in the car more so than it was ten years ago. One laggard has really been construction and why? I think interesting innovation and technology around it's really all sorts of different things, it its material replacement, so please. I replacing traditional word that you would use in tat by the time of the harm with more environment. The friendly, durable materials, in home technologies. One of my favorites is a letter from windows which are windows that automatically change intent. Dramatically changed the experience the arm in terms of biting you don't need blind that sort of thing and also changes just the energy efficiency of the home and then
Firstly, your seen changes in the way that homes are actually bill so taking more of that construction moving it off site. Maybe more efficient, taking some of the labor out of it, I think you're gonna see that trend really emerge. You you, you brought something interesting and more specific. What was the connected hard, I think, at home. It is quite interesting when I taught my going products clients because from a consumer standpoint is exceptionally important, but it's really a trend that being driven by big tat like Amazon and Google too long lions know that they have to play in that eco system and they have to be relevant their reticent to really trying to lead that movement. Given your competition, seeks to the other building, cries manufacturers and start to be very large, very well. Capitalist up so I see how do you view your ralds change alone, that there is much emanate eye on what What role now is what about visor to your clients today compared to normal state business, when this crisis first started?
focus was really distilling all of the information that was out there the virus and about the implications of the virus into what was most relevant and most critical to our clients, the net. stay. It was really on a client. My client base is doing downside scenario plan. I understand their liquidity and making sure that they were in the position to whether a book could be very counter now. The world situation, where I think we all have a much better understanding, at least on the range of possible outcomes of this crisis, is returned to more strategic dialogue and, frankly, more traditional doesnt back dialogue, which is the acquisition of capital and the allocation of capital to apply
you're still concern, and there still downsize scenario planning. We are starting to have bigger discussions about what should you be doing differently today than you were doing pre crisis to make sure that you meet your strategic objectives? Last summer hopeful note lighter clauses on they will personal. I ask all I guess what they ve been doing a little differently these days. Anything you ve been doing this all different in the way you are looming before the crisis, so how its ethical question I have been trying to keep alive my typical routine. One thing: added, which was actually the recommendation acquire? Is I've been reading Warren Buffett shareholder letters dating back to nineteen fifty seven in this working through them chronologically, and I think it's been, It's been interesting for two reasons: first. Is it just a great history lesson hearing what was going on in the? U S economy generally in the market, specifically from the personnel if someone who is experiencing them at the time then too. It's a good reminder that, while we haven't seen this set of facts before
we have seen similar crises and we want, Is there an alarming he's come out. The other end stronger, as has also been a powerful message that we will get through this is well issued, is repeated, often rhymes. those who are joining us in italian greek conversation. Thank you so much. I really appreciate the time. That concludes this episode of Exchanges- Goldman Sachs thanks for listening and if you enjoy the show we hope you subscribe, and I will pass and leave a rating or a comment in June for a weekly markets update Friday morning, where leaders around the firm provide their take on it's in: what's the new volatility this time. asked is recording on April twenty twenty twenty making all price references and market forecasts correspond to the date of this recording this pot cash should not be copied, distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity. To
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Transcript generated on 2021-07-02.