Housing Starts Surge: Material Suppliers Prepare for Increased Demand

Housing starts rose to a 1-½-year high at 14.8% in November. According to a mid-December report from the U.S. Department of Commerce, permits for future construction of single-family housing in November increased to the highest level since May 2022.

A drop in mortgage rates in mid-December could provide a further boost to housing starts in the coming months as potential buyers are drawn back into the housing market. Despite the U.S. Federal Reserve signaling multiple rate cuts in 2024, the current average interest rate for a 30-year fixed mortgage is 7.04%, up 5 basis points over the last week. Greg McBride, Bankrate's chief financial analyst, expects rates to fall gradually throughout the year, reaching 5.75% by the end of 2024. "Mortgage rates will spend the bulk of the year in the 6s, with movement below 6% confined to the back half of the year," McBride told Bankrate.

Why it matters: Increased housing starts can impact credit professionals as it signals economic growth, potentially reducing credit risks and improving borrowers' ability to fulfill obligations. This means suppliers of construction material such as lumber, steel, concrete and windows will be in high demand. Requests for extending credit limits may also rise as construction projects increase.

What credit managers are saying: "We are definitely seeing the need to stretch existing credit limits when purchasing from our customers increases for new housing projects," said Brett Hanft, CBA, credit manager at American International Forest Products, LLC (Portland, OR). "While we continue to receive more credit applications for new customers than we expect for this time of year, I don't think they necessarily correlate to businesses focused on new single-family housing."

Even if you haven't seen an increase in customers or requests for credit line extensions, it's important to prepare for when demand is high, and supply is limited as a material supplier. "Just like many other businesses in the industry, we are always looking for additional mills who have the ability to produce products we need to purchase so we can adequately fulfill the needs of our customers," Hanft said. "While we have a tenured and seasoned administrative staff, we are always looking to add to our team as the need arises."

A slight fluctuation in mortgage rates can frequently determine whether a project proceeds immediately, gets deferred to the next year or possibly doesn't materialize. "As payments decelerate due to delayed funding from projects and general contractors, suppliers confront a dilemma," said Sam Smith, senior corporate and collections manager at Crescent Electric Supply Company (Hazel Green, WI). "Should we accommodate the customer's request for an increased credit line while their Days Sales Outstanding (DSO) rises, or maintain the status quo? Each situation presents its unique challenges and solutions. We've established regional distribution centers across the country, enhancing our ability to meet customer needs through improved inventory management and timely deliveries. With increased capacity and expertise, we are well-positioned to take on additional business."

Yes, but: According to Smith, interest rates are not the sole factor shaping the housing market. Other influencing factors include:

• Employment rates
• Wage growth in relation to inflation
• Consumer confidence
• Availability of existing homes for sale
• Existence of open lots suitable for construction

"We're personally not seeing any effect from the increase in housing starts, but we've been pretty busy for the last couple years," said Edward Olewnik, CCE, senior manager of credit services at CertainTeed LLC (Malvern, PA). "It may take some time for things to happen because by the time they plan out a site and they start building, it could take six months to a year before we actually see activity on our end."

Mike Hill, CCE, NACM Board director and director of credit at MiTek USA, Inc. (Chesterfield, MO) whose company does home and residential construction remained in good standing for 2023 when it came to construction projects. "While we have not started seeing the positive impact yet, we are counting on it since there is usually a delay of a few months," Hill said. "As for personnel resources, we have hired more people. However, we are trying to attack that area more in terms of automation and increased efficiency. I believe the latest increase in housing starts possibly means more than previous jumps. Perhaps it indicates that we will avoid a serious recession and just go through more of a market correction."

The bottom line: High home prices and low inventory continue to challenge first-time buyers. Credit professionals must balance demand with the risks of extending credit limits.

What's next: Credit professionals should look at existing customers needing larger credit lines or new customers coming on board because of the large amount of building that's going on, said Chris Ring of NACM's Secured Transaction Services (STS). "In addition to considering the ability to fulfill orders, credit professionals should also assess whether they have the necessary warehouse capacity and credit staff to handle an increase in demand."

-Jamilex Gotay, editorial associate