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Hearth & Home February 2019

Heart Attack?

By Bill Sendelback

Fifty-five percent of U.S. single-family housing starts in 2017 did not include a fireplace.

“The fireplace? The heart of the home itself.”

— Frank Lloyd Wright

Even with new-home construction slowly continuing to improve, the chance of a fireplace being installed in many of the new homes is slipping away. That should be, and is, a major concern for the hearth product industry, particularly fireplace manufacturers.

The number of housing starts has improved in recent years, but are nowhere near the totals from the heyday of homebuilding around 2000 to 2005. In 2018, single-family housing starts appeared to stall. Single-family housing starts in 2016 were at 722,000, up 68% from the low of 2011. That total rose again in 2017, up another 21% over 2016 to 877,000.

However, the latest totals from the National Association of Home Builders (NAHB) indicate that 2018 single-family housing starts totaled 865,000 units, down about 1% from 2017.

Even so, the NAHB forecasts that single-family housing starts will increase by 7% to 927,000 units in 2019, while multi-family starts will drop 4.4% to 366,000 units. A bright spot for the hearth products industry is the NAHB forecast that, in 2019, it expects home remodeling to be up 7% after a 9% increase in 2018.

Both consumer confidence and builder confidence remain good, but are sliding down, according to The Conference Board. “Consumers are still quite confident that economic growth will continue at a solid pace into early 2019,” according to Lynn Franco, senior director of Economic Indicators. “However, if expectations soften further in the coming months, the pace of growth is likely to begin moderating.” Franco bases this forecast on “a less optimistic view of future business conditions and personal income prospects.”

While builder confidence in the market for new single-family homes is high, that confidence recently dropped eight points to 60 (anything over 50 is considered good), says The Conference Board. The drop is attributed to growing concerns about the affordability of new homes. “Builders report that they continue to see signs of consumer demand for new homes, but customers are taking a pause due to concerns over interest rates and house prices,” according to the Board.

Mortgage interest rates, too, are having an adverse effect on new-home sales. The Conference Board reports that the average 30-year fixed mortgage rate is now 4.9%, up a little more than one percentage point over last year.

One reason for a slowing in single-family housing starts is that homebuilders are having trouble finding qualified workers, a top issue with homebuilders for the last four years. While over the last year almost 128,000 workers were added to the residential construction and remodeling industries, in October, 2018, there were 292,000 unfilled jobs in the construction sector, according to Robert Dietz, chief economist for the NAHB. That is partially because of the current U.S. unemployment rate of 3.7%, near a 50-year low.

Other issues helping to slow new-home construction, according to Dietz, are that “home prices are rising faster than income. Affordability continues to decline as home prices rise.” Available property, or lots, continues to be an issue for homebuilders. Sixty-four percent of homebuilders say the tight availability of lots is a problem, says Dietz.

New homes without fireplaces by region.

Although most manufacturers believe that a fireplace is one of the most desired features consumers want in a new home, the incidence rate of a fireplace being installed in a new home continues to fall, and that’s a major concern for fireplace manufacturers.

“This declining incidence rate of fireplaces is a real challenge for our industry,” says Jeni Forman, senior vice president, U.S. Sales & Marketing, Dealer & Wholesale channels for Hearth & Home Technologies (HHT), “and it will have an impact on our business.”

According to the U.S. Census Bureau, 55% of U.S. single-family housing starts in 2017 did not include a fireplace. That’s the highest percentage of new homes without a fireplace since 1973, and that percentage has been increasing every year since 1973.

Surprisingly, 60% of owner-built or custom homes do not include a fireplace, the Bureau reports. Currently, in the West, 60% of new single-family homes have no fireplace. The South is close behind at 57%, while the Midwest is at 47%, and the Northeast champions fireplaces with only 41% of new homes without a fireplace.

“As home prices go up, fireplaces tend to be dropped by the builder in an effort to sell houses,” says Tom Krebs, executive vice president of Sales and Marketing for Innovative Hearth Products (IHP). “These builders tend to cut out a $2,000 or $3,000 fireplace or make them an option. Our industry needs to worry about fireplaces being ‘optioned out’ of existence in tomorrow’s homes.”

“We can’t complain about the dropping incidence rate of fireplaces in new homes when we sell the crappiest fireplaces to homebuilders,” according to Nick Bauer, president of Empire Comfort Systems. “This is a product where you just can’t compete only on price. If the customer’s first experience with a fireplace is a cheap model, they won’t want another one. Our industry needs to do a better job of promoting the quality products we offer.”  

Empire Comfort Systems does not count itself as a “big player” in manufacturing fireplaces for new-home construction. “We are more a manufacturer of higher-end, heat-producing models, so we’re more focused on the custom homebuilders,” says Bauer. “Even so, with the early cold weather this winter, we have been slammed with orders. We’re going to remember the winter of 2018-2019.”

“We’re seeing a softening in new-home construction, so we don’t expect 2019 to be as strong as 2018,” according to Roger Oxford, senior vice president – Strategic Growth – New Home Market for HHT. “The demand is there, but interest rates are rising and with inflation, new-home affordability is being adversely affected. With the constraint on homebuilders of fewer workers now available, the ability of homebuilders to produce is slowing and builder confidence has dropped.”

Oxford points out that new-home buyers want a fireplace, but the consumer awareness of the variety and improvements in new fireplaces is very low. “Even so, we expect growth in 2019, but not as much as in 2018.”

“Our sales to the new-home construction channel have become somewhat flat,” according to IHP’s Krebs. “The rising costs of construction materials and of land, when it is available, are affecting the affordability of new homes. This is having an impact, particularly on starter and tract home sales.”

Krebs points out that new environmental restrictions in some states are “about to eliminate entry-level, wood-burning fireplaces. Regulations now in California and Texas, aimed at reducing the air exchange rate in new homes, are having a major impact on this market, probably eliminating open hearth fireplaces.” Krebs points out that, as a result, many homebuilders believe it will double the price of a fireplace for them to install gas, direct-vent models. So they just won’t include or offer fireplaces. He acknowledges, however, that mid-level and custom homebuilders are still offering fireplaces.

IHP is upgrading all of its gas, direct-vent fireplaces to improve efficiency, produce more heat, and include better flames and larger log sets.

Mason-Lite by Masonry Fireplace Industries began manufacturing modular masonry fireplaces 12 years ago to take advantage of the existing growth in higher-end custom homebuilding. “But with the economic downturn of 2008, much of that business petered out,” says Bill Harris, managing partner. Now, with new-home construction again on the rise, Mason-Lite is focused on architects and designers of larger homes, $500,000 and up, most including multiple fireplaces.

“These people want a larger, open hearth fireplace, especially in a Great Room.” While most new fireplaces are factory-built, zero-clearance models, Mason-Lite has taken advantage of the disappearance of skilled masons to offer site-built, high-end masonry fireplaces.

Napoleon Fireplaces sees the U.S. new-home construction market flattening in the last few months because of mortgage rate hikes and the lack of qualified labor. “During the economic downturn of 2008 to 2010, homebuilding labor left the industry to find work, and most have not come back,” according to John Czerwonka, vice president of Hearth Sales. “Homebuilders continue to be very bullish, but consumers have retreated some.”

The new-home building market in Canada is “down a little,” and Czerwonka expects that to continue into 2019. “However, we expect new-home building in the U.S. to be fairly good for the next year or two, maybe falling back in three years.

 “With consumer confidence up, and with money to spend, we see more homebuilders, those building 200 to 300 homes a year, putting in Design Centers and using specialty hearth dealer showrooms, as an opportunity for fireplaces. Hearth is back and will improve if we educate homebuilders and consumers about the available new hearth products.”

Recognizing the value in educating homebuilders and hearth products dealers of the importance and influence on consumers of hearth products, Napoleon three years ago commissioned an extensive, professional consumer study to learn how home areas and various factors impact homebuyers and their purchasing decisions.

This Hot Spots Research Study interviewed 900 potential homebuyers, 30 to 50 years old and with an average annual household income of at least $100,000. In just one small part of the study, when consumers were asked to evaluate rooms with a fireplace versus rooms without a fireplace, those rooms with a fireplace were much more likely to be associated with the positive emotions people crave, the study said.

Napoleon commissioned the study for the benefit of the entire hearth product market, Czerwonka says. The Hot Spots Research Study and Hot Spots Design Guide are available from Napoleon.

Fireplaces for large, tract homebuilders tend to be sold by one-step, installing distributors. But there is a significant and more profitable market for specialty hearth product dealers with small and custom homebuilders.

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