At a Rolling Stones concert in San Diego this past fall, fliers were being handed out offering condo buyers a new car with the purchase of a unit. This clearly marks a turn from a sellers’ market to a buyers’ market.
Is the bloom off the housing rose? The business press writes daily about this emerging housing downturn, citing rising mortgage rates, higher energy costs, widespread talk about the risk of a “bubble” in housing, and a surge in the number of homes on the market.
“Ready-mix producers will see gains in 2006, despite a slowdown in housing.”
At year-end, 30-year fixed mortgage rate stood about 6.75%, the highest in more than two years, compared with 5.2% in June 2003, which was the lowest in four decades.
The housing boom has enjoyed almost a decade-long run. Housing then went into overdrive in 2001 when the dot-com bubble burst and investors sought refuge in the residential housing as one of the only safe investment alternatives. This resulted in white-hot growth in volume over the past four years, which has raised average housing prices more than 50% nationwide, and doubling in many of the hotter markets.
Doug Duncan, chief economist of the Mortgage Bankers Association (MBA), had said the market had peaked. Because of brisk sales earlier this year, the MBA expects sales of new and previously occupied homes will have reached a record 8.3 million in 2005, up 4% from 2004.
But analysts were taken aback when the U.S. Commerce Department said sales of new homes and townhouses jumped 13% in October to a seasonally adjusted high of 1.42 million units. But this could be an anomaly, since fence-sitters often jump into the market to lock in mortgage rates before they go even higher. Builders also cut prices to move unsold homes.
Still, sales are projected to decline 3.5% next year, ending the four-year, record-setting streak. Home builders, large and small, say traffic to new-home communities is down, waiting lists are disappearing, and inventories are inching up.
Producers’ concern
What does that mean for the ready mixed concrete industry? Those producers in the strongest housing markets—Las Vegas, Northern and Southern California, Florida, Texas, and parts of the East Coast—who have enjoyed a strong residential component to their volume in recent years may not feel the downturn at all, and may just be facing a shift in their business mix.
Despite the residential construction slowdown, we forecast ready mixed concrete volume to grow again in 2006. With cement consumption expected to rise by single digit percentages next year, this translates into more concrete consumption. Total volume in 2006 could reach 460 million to 470 million cubic yards, up from a preliminary 456 million cubic yards in 2005.
PCA projects strong cement demand through 2009, so strong occasional shortages will persist. So there will be a few good years still ahead for the industry, despite the residential construction market plateauing for the foreseeable future.
Where is this growth in concrete consumption coming from if the housing market is slowing? Pent-up demand for non-residential construction may be the next opportunity, coupled with an increase in public works projects that have been delayed as states juggled to balance budgets coming out of the last recession at the beginning of the decade.
Now, most state budgets are balanced, with some even running surpluses. This means new highways and public building projects are starting to pick up steam in many areas.
This growth is dramatic, considering that the industry only produced 396 million cubic yards as recently as 2002. Despite a slowdown in housing, the next few years look even stronger for the ready mixed industry.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at pvillere@allenvillere.com or telephone 985-727-4310.
© 2006 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “Housing’s Hiccups” (The Concrete Producer, January 2006) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “Housing’s Hiccups” under license from Hanley Wood, LLC.