By Andrew Warnes

Does the nationwide decline in new home construction have implications for the residential water treatment industry?

Almost every residential water treatment dealer in the US has heard the tale that POE softener and filter sales tend to follow the trends of new home construction and sales. When you hear that (or any) story often enough, from a number of sources, you speculate that it might be true. The recent home building downturn across America may have you wondering, therefore, about how this industry will be impacted and when. This article attempts to link our industry to a number of economic indicators and to find out if we really are hostage to the housing market. It is not intended to be an authoritative report; it’s more of a look into the crystal ball while perusing a stack of reference books and newspapers to predict what may or may not happen.

A new year
In January of 2007, the National Association of Home Builders (NAHB) reported that year over year construction permit applications for single-family homes in the US were down 16 percent. Regionally, that broke out to the northeast down 16 percent, the midwest down 25 percent, the south down 12 percent and the west down by 25 percent. Even the ‘hot’ sunbelt markets were down: Phoenix was off by 34 percent, Las Vegas by 29 percent, San Diego by 37 percent and Miami was down 36 percent.

The US has been enjoying a prolonged building boom for the past 20 years. Our last serious recession occurred in the early 1980s; since then, the country has seen impressive growth, particularly in new home construction. It’s unrealistic to expect this to go on indefinitely.

While we do not have independent statistics reporting the shipments of residential water treatment equipment during the last serious economic downturn, we do have the Water Quality Association (WQA) Tank and Valve Shipment Report going back to 1990. This provides 16 years of industry-reported shipments of residential water treatment system control valves and it is probably the most reliable indicator of how many systems were supplied during this period. (WQA provides this and other reports as a service to its members—the data is available on the members-only section of www.wqa.org)

Chart 1 compares residential control valve shipments to macro indicators like population growth, gross domestic product (GDP), family incomes and other general factors.

There does not seem to be a correlation between these indicators and residential water treatment system shipments, other than the fact that all have trended upwards for the past 15 years. Control valve shipments did appear to curve downwards with overall US industrial production in 2000/2001, but water treatment systems rebounded more quickly than industrial production in 2002.

Chart 2 compares residential control valve shipments to labor and economic indicators like inflation, household debt and unemployment and interest rates.

Again, there does not seem to be a ‘smoking gun’ indicator here that we can rely on to explain the trend of water treatment equipment shipments. Interest rates have decreased quite a bit since 2000, but the rise in valve shipments appears unaffected. Household debt has risen considerably; our industry has likely benefited from the tendency of Americans to consume beyond their means, but debt and valve shipments do not track consistently over the past decade and a half. Interestingly, household debt as a percentage of total assets was only 4.3 percent in 1945, but sits above 17 percent today.

Charts 3 and 4 compare residential water treatment control valve shipments to other ‘big ticket’ items that we compete with for consumer dollars. Chart 3 tracks consumer durables like cars, refrigerators, dishwashers and laundry room appliances. Chart 4 tracks the ‘hot’ products like plasma televisions and laptop computers.

Despite the obvious conclusion that many owners of a dishwasher or washing machine could benefit from a whole-home water treatment system, dishwashers outsold water treatment systems by a factor of more than seven to one in 2003 and clothes washers outsold our products by a factor of more than nine to one in the same year. Each of the durable goods products tracked appeared to trend upwards faster than our products, though each showed a small dip in growth in 1999. None seemed to correspond to water treatment system sales (though something must have caused all of them to slow slightly in 1999). Compared to consumer electronics, the POE water treatment industry is mature and stable. Adoption of these products is several orders of magnitude greater than whole-home water treatment and much quicker. In 2004, the number of plasma TVs shipped was somewhat equal to the number of control valves shipped. From 2004 to 2005, the number of plasma TVs shipped roughly doubled, while control valves remained relatively constant, even though price points to end users may have been similar (or even cheaper, in the case of  POE systems).

Chart 5 compares residential water treatment system control valve shipments to US housing and construction data. The indicators include housing starts, completions, new homes sold and the Housing Price Index. Compared to any of the data presented previously, this chart appears to show a close relationship between key indicators and valve shipments.

There are quite a few interesting correlations between housing statistics and water treatment control shipments. It appears that valve shipments trend slowly upwards with new home starts, but bump upwards relatively quickly when new homes are sold. It also appears that when housing starts go down, valve shipments follow behind them with a lag of six to eight months. A dip in home starts in 1999 might also explain why growth in refrigerator, dishwasher and clothes washer shipments also flattened out during that period. If you consider that the other consumer durables are often installed before the home sale and residential water treatment systems are often installed after occupancy, the numbers seem to fit together nicely.

Conclusions and opportunities
Of all the factors considered, the US residential POE water treatment industry appears to be most closely linked to the housing construction industry. Although we do not have valve shipment statistics dating back to the last big housing slowdown, we can see our shipments echoing small changes in new home starts and sales since 1990. The real proof of the correlation between water treatment and home construction should come in March/April 2007, approximately six to eight months after new home construction in the US began to slow down in September 2006.

The residential water treatment equipment dealers that have focused on new construction and new home sales might soon find themselves faced with diminishing opportunities. The drop could be as sharp as the drop in new housing starts (16 percent year over year nationally as of the end of 2006 and more in specific markets).

If the drop in business materializes in 2007, the best defense might be a smart offense—or several new initiatives. First, some dealers may have to reconfigure their operations to target existing housing instead of new construction. Second, a focus on higher-end customers, offering differentiated upscale products. Third, an emphasis on service revenue and the existing customer base. Finally, the introduction of new technologies which can be offered to existing customers, thereby expanding the customer base. Air filtration, ultrafiltration for bacteriological disinfection and RO are all good examples of technologies that can build upon existing products customers already have.

Sources

  1. WQA Tank and Valve Shipment Report, Water Quality Association, www.wqa.org
  2. Appliance, 53rd Annual Report, 2005 Ten-Year Statistical Review, Dana Chase Publications, www.appliance.com
  3. Business Statistics of the United States, 1995 and 2006 Editions, Bernan Press, Lanham, MD
  4. United States Federal Reserve
  5. United States Department of Commerce, Bureau of the Census
  6. United States Department of Commerce, Bureau of Economic Analysis
  7. National Association of Home Builders, www.nahb.org

About the author
Andrew Warnes is Director of International Sales and Marketing for GE Homespring point of entry ultrafiltration systems. He can be reached at (847) 274-0595, andrew.warnes@ge.com or www.homespring.com.

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