For Building Products Suppliers, Residential Recovery Pushed Out, Again

While we had previously expected a gradual recovery in residential markets to begin in 2027, including slight growth in existing home sales and single-family starts, our most recent update reflects a more sanguine outlook for building products suppliers in the near-term. The conflict in Iran is driving inflation in raw materials and freight, mortgage rates have moved meaningfully higher and a volume-led upturn now appears unlikely until 2028.
 
Near-term trends have help up better than feared at this point, though supplier growth of late has been driven entirely by price realization. While suppliers have pushed through some price increases to cover rising input and transportation costs, the share of our building products contacts granting price concessions also sits near record highs. A tepid demand backdrop has kept full realization at bay in some areas, most significantly with the large production homebuilders. 
 
Looking to 2027, though, we view risks as skewed towards the downside, particularly for residential volumes. While home improvement has been resilient in some areas, and its share of consumer spending has appeared to stop shrinking, rising rates have historically weighed repair and remodel activity. Another year of extremely depressed existing home sales, and muted home price appreciated, is likely to weaken consumer sentiment towards investing in the asset class.
 
New residential is likely to remain the weakest link for suppliers. Another year of volume declines is likely, and builders facing costlier rate buydowns will keep pressing suppliers on price to protect their own margins. If builders scale back incentives instead, price pressure may ease, but volumes would suffer.
 
Non-residential is a relative bright spot. Many contacts have cited growing backlogs and limited project cancellations to this point. However, in past rate hike cycles, non-residential activity has slowed on a lag, suggesting a moderation could come in 2027. 
 
At this point, we expect a broader recovery to take place in 2028, though this is dependent on the trajectory of interest rates. Assuming rates moderate by then, we expect both the new and existing home markets to begin inflecting higher, albeit modestly. Nevertheless, a long-awaited return to steadier volume growth will be a welcome change for many executives and investors across the builder products industry.