CEDIA Sees Custom Market Up Despite Falling Housing Starts

By Joseph Palenchar On Sep 4 2006 - 6:00am




Single-family housing starts are poised for their biggest percentage decline since 1990, but the custom-installation market continues to expand, and so will next week's CEDIA Expo.

For the first time, the show floor will be open for four days instead of three to accommodate the expected crowds. Exhibit space will jump 16 percent to 310,500 net square feet, the number of exhibitors will rise to 575 from about 560; and attendance will exceed last year's record of more than 26,000, CEDIA also said.

Installers will also see larger booths now that CEDIA raised its booth-size cap for the first time since 2004.

The number of seminar topics will also grow, hitting about 300, up about 10 percent even though one less day is devoted solely to education.

The show is growing along with custom-channel revenues, although the industry's revenue growth is slowing slightly because of a decline in single-family housing starts and rapid price compression in video-display technologies, suppliers said. Architectural speakers are also experiencing some price compression.

New single-family homes account for the majority of custom-install revenues, and for the year through July, single-family housing starts fell 6.2 percent to 1.45 million, Census Bureau statistics show. The National Association of Realtors (NAR) forecasts an 11.3 percent decline for the full year to 1.52 million and a 9.3 percent decline in 2007. This year's forecast, if accurate, would mark the steepest percentage decline in single-family housing starts since 1990's drop of 10.8 percent. If NAR's 2007 forecast is on the mark, next year will mark the housing industry's first consecutive full-year declines since a five-year string of declines ending in 1992.

Sales of new single-family homes have fallen further than housing starts. For the seven months ending July, sales were down 14.2 percent to 682,000, according to Census Bureau statistics.

Despite the decline in housing starts and home sales, the roof isn't caving in, installers, suppliers, and distributors told TWICE. For one thing, NAR-forecast housing starts for 2006 would be the third highest on record. For another, consumer awareness of custom-installed electronics is up, generating a continued rise in penetration in the houses that are built. On top of that, dealers and suppliers said the custom market still remains under-penetrated, and builders are promoting custom-installed A/V options more aggressively to differentiate themselves from their competitors.

These views are reinforced by the results of recent consumer and builder surveys conducted by the CEA and National Association of Home Builders (NAHB). (see p. 18.)

Other reasons for optimism, marketers told TWICE, include:

  • Custom builders' relative insulation from the housing decline because their customers' incomes are higher than the incomes of production-home buyers;

  • Declining custom-system prices should raise demand; and

  • Stability or growth in the number of homeowners refinancing their mortgages to pay for home remodelings, which often include custom-installed home theaters and other custom systems.

Because of these factors, the custom-installation industry will grow in 2006, perhaps at a slightly slower percentage rate but likely in the high single digits, marketers told TWICE.

Still, not everyone is sharing equally in the growth, marketers admitted. Installers allied mainly with production-home builders are more likely to feel the impact of housing-start declines than installers allied mainly with custom builders, said executives at Sonance, AVAD, and other companies.

"The biggest opportunity for growth is in the entry-level and middle market, and this is the part of the market that's most sensitive to interest rates," said Steve Crawford, Sonance's chief marketing officer. Sonance dealers, however, are allied mainly with custom builders and are "still writing as much business as they can handle," he said.

The housing market's "soft landing" is more than offset by rising consumer demand for custom systems, builders working harder in a down market to differentiate themselves, and rising penetration rates of structured-wiring packages, mainly for computer networking and Internet access consumers, Crawford said. "Once structured wiring is in, you create the backbone for multi-room audio and whole-home control," he explained.

"Consumers expect more technology and upgrades beyond appliances and granite countertops," Crawford added.

Though penetration rates are up, they still have a way to go, Crawford and other marketers said. They point to surveys conducted by the CEA, NAHB, and by Parks Associates, which found in its 2006 builder survey that about 70 percent of home builders offer multi-room audio systems but installed them in only half of the homes they sold in 2005. The survey also found that more than half of the surveyed builders offer home theaters but installed them in only 23 percent of the homes they sold in 2005.

"In the past, the industry had such low penetration rates that a housing slowdown didn't matter much," said AVAD president Bob Gartland. "That's still true to some degree," he said of penetration rates.

This year's housing slowdown could further push up penetration rates, he added. "As [new home] inventory starts to sit," production builders will opt "to use custom systems to differentiate themselves," he predicted. "I'm not saying builders have ever been aggressive, but they are less resistant and open-minded to our products to help accelerate their home sales."

The decline in housing starts, however, is having an impact on the custom market, he said. "Generally, installers are a little less booked. They typically run at 110 percent of capacity, and we detected a little pause [in the number of installations in progress] in the past 60 days," he said in mid-August. "Installers are not booked quite as far out, but it varies around the country," he continued.

"Housing was over the top and bound to settle down, but I'm not convinced it will significantly hurt the CI market," Gartland added.

Some custom-only dealers, however, are feeling pain, but more so because of rapid price compression in video displays, Gartland continued. "There has been such tremendous price compression on key high-ticket items like flat-panel TV that, on average, I'd say pure-custom installers are probably flat." These installers "don't have a scalable business and can't make it up in more projects because they can only do so many projects a year,'' he explained. "They can't grow even if the industry grows."

Most of these businesses aren't scalable because "each job is a one-off that needs a high level of design and engineering talent that's hard to find," Gartland explained. Installers allied with production-home builders, on the other hand, sell a limited selection of pre-engineered packages into production homes and don't need as much design and engineering talent on hand, he continued. Ironically, "the production-home installer has the more scalable business, but he's probably impacted more by housing starts," Gartland said.

Although both types of installers might be getting hammered, the CI channel continues to grow, largely because new A/V installation companies have started up "to fill the gaps by installers who can't scale up," Gartland said. "There are more dealers to meet growing consumer desire."

Many of the companies filling the A/V gap are coming from the ranks of security and IT installers and electrical contractors, and many of them will come to a CEDIA Expo that is reaching out to them. CEDIA president Andy Willcox noted that CEDIA is marketing to such companies because "they're migrating to our channel, and we want to educate them."

Other "new fresh faces" expected to attend the Expo are builders, interior designers, and architects for whom CEDIA developed Expo educational seminars, added Willcox, who owns Pro Line Media Systems of Highland Park, Ill.

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