Though the 2-year-old housing slump is expected to continue at least until the end of 2008, the worst of times for the $3 billion vinyl siding industry may be coming to an end.
``Our conversations with window and siding people suggest the sales into that sector are bottoming out,'' said Steve Brien, global practice leader for chlor-alkali and vinyls studies for Chemical Market Associates Inc. research firm in Houston.
In a telephone interview Nov. 14, Brien said sales of PVC resins to the U.S. and Canadian vinyl siding markets in 2008 should be ``almost identical'' to 2007.
``I don't think we are going to see an increase, but there won't be a huge drop, either.''
Resin sales to those markets are down 25.4 percent since 2004, he said, triggering industry consolidations and shutdowns of high-cost plants.
Ply Gem Industries Inc., which is moving its headquarters from Kearney, Mo., to Cary, N.C., announced in October it will close its Denison, Texas, plant in the first quarter of 2008. Six months earlier, it had shuttered its Atlanta plant. Both of the factories were acquired in its $305 million acquisition of Alcoa Home Exteriors in October 2006.
In July, Cie de Saint-Gobain - the parent of CertainTeed Corp. - purchased the siding and distribution business of Owens Corning, which included three vinyl siding plants in the U.S. and Canada.
``The market has gotten extremely competitive and the margins have gone down to zero,'' Brien said. ``That is why you are seeing siding companies shutting down high-cost plants and the purchase of one company by another.''
After the Denison plant closing, Ply Gem will have four vinyl siding plants, along with window fabrication plants it purchased in the past 22 months from CertainTeed and AWC Holding Co.
But, despite Brien's optimism, the industry remains uneasy about the housing slump, which is not showing signs of a recovery any time soon.
``We are concerned about the housing downturn because so much PVC - about 65-70 percent of it - goes into construction,'' said Allen Blakey, director of public affairs for the Vinyl Institute in Arlington, Va.
Housing starts in October were 1.23 million, just above the seasonally adjusted 14½-year low of 1.19 million, according to the Department of Commerce. In addition, the National Association of Home Builders/Wells Fargo Housing Market Index remained at 19 for November - its lowest point since the index began in 1985 and well off a high of 72 set just two years ago.
NAHB surveys home builders, looking at single-family sales, single-family sales in the next six months and buyers. A rating of 50 indicates an equal amount of negative and positive responses.
At the NAHB construction forecast conference in Washington in late October, Maury Harris, managing director and chief U.S. economist at UBS Investment Bank in New York, projected housing starts to be just 1.37 million in 2007 and 1.24 million in 2008, a downturn the likes of which the industry hasn't seen since the 1960s.
Yet some experts do not expect the downturn to throw the economy into a recession - inflation is low, employment in other sectors is good, there is room for the federal funds rate to come down further, and the weaker dollar has boosted export markets for U.S. goods.
But the possibility exists.
``If there is more financial turmoil because of the mortgage credit crunch, businesses could lose faith, lay off people and we would have a recession,'' Harris said. ``But I don't think that will happen.''
Economist Mark Zandi said he thinks the greatest danger could come from a chain of events.
``The biggest negative risk is that what happens in the housing market affects the consumer's willingness to spend, particularly among people in the lower-to-middle earnings category,'' said Zandi, chief economist and co-founder of Moody's Economy.com in West Chester, Pa. ``That could be the catalyst for businesses outside of housing to lay off workers and lead to a recession.''
The downturn's length and depth worries Cliff Waldman, an economist with the Manufacturers Alliance/MAPI in Arlington.
``The housing market downturn in the U.S. has created an uneasiness and uncertainty about the future of the U.S. economy,'' said Waldman. ``The longer it continues, the more skittish business will become about investments and the greater the likelihood becomes that the prolonged housing downturn will impact consumer spending.''
He said that could throw the economy into a mild recession and lead to a drop in demand for imported goods, which could impact the economies of countries that make products for the U.S. market.
``Global growth is holding up, but the U.S. might be staring at a downturn.''
In addition, Waldman said ``the liquidity crunch and shock'' triggered by subprime mortgage lending practices has led to ``tighter and tighter lending standards in the U.S.'' that may actually prolong the housing downturn and could have financial repercussions globally.
``The financial markets are increasingly becoming globalized and are impacted by the U.S. subprime market.'' It could cause banks in Germany, the United Kingdom, the Eurozone and Japan to be cautious in their lending practices.
Economists at the conference disagreed on when in 2008 the downturn will bottom out. But most said not to expect housing starts and sales to resume their year-over-year growth until 2009 at the earliest - and even then the level of building will be at a pace similar to that of the early 1990s, when starts ranged between 1 million and 1.3 million.
``The current conditions are bad and the industry faces problems that must be corrected before it can go forward,'' Zandi said. ``2008 will be an extremely difficult year.
``I think house sales will hit bottom in the fourth quarter of 2007, but that housing starts will not hit bottom until the second or third quarter of 2008. Housing prices will continue to decline all through 2008, with the bottom occurring in the fourth quarter of 2008 or the first quarter of 2009.''
Holding back any immediate upturn are inventories of new and existing homes that total almost 1 million and represent an eight-month supply.
``That is a record in both the number and as a percentage of existing house stocks,'' Zandi said. ``There is too much excess inventory. Until we make a dent in that, we will not reach bottom. This downturn is well beyond anything I expected.''
``Everything is contingent on getting inventories back in shape,'' said David Seiders, chief economist at NAHB. ``If that stays high, the housing recovery may be farther away. The way the housing market has turned since spring is pretty alarming. Housing starts are almost certainly not going to be higher in 2008. Our best hope is that we bottom out sometime in 2008 and see some turning up.''
Exacerbating the inventory woes are the high number of delinquencies triggered by subprime mortgage lending practices during the boom and the high number of mortgages in the hands of investors who had hoped to capitalize on escalating real estate values.
``We will be cleaning up for years the vacant units and houses bought by speculators for expected gains,'' Seiders said. ``There is a lot to dig out of.''
Those troubles also have repercussions for the rest of the housing market, said Harris of UBS.
``The inventory problem is worse than in the last cycle, as more mortgages are in the hands of [investors] outside the community who can't renegotiate,'' Harris said. ``So it weighs more heavily on the market than in past cycles. It is a vicious chain. If someone is unable to buy your home, how do you buy your next one?''
In addition, the potential for further declines in house prices has buyers holding back.
``It appears that there will be a continued decline in home prices through early 2010,'' said Mike Moran, chief economist for Daiwa Securities America Inc. in New York. ``That is dampening demand right now, because if you are a buyer, you are going to be hesitant.''
