The ever-growing housing market is shoring up the recovery in ready-mixed concrete production, and this year is on track to be the best in terms of volume and pricing in over a decade.
The first third of the year is behind us, and only now are we starting to see the construction “season” blooming around our industry. The end of April and first part of May signals the start of ready-mixed concrete production that has come into full swing, as even the coldest climates in the country start to take orders for their biggest seasonal projects. So far, one-third of the way around the 2018 track, the race looks good when you read some of the construction statistics. A good example is the state of new housing starts, an important component of overall construction health.
As has been widely reported throughout the construction press, February single-family housing permits were up a robust 11% compared to 2017; between February 2017 to February 2018, 34 states saw growth in single-family permits issued. Seventeen states, including California, recorded a growth above 11.2%. This is coming off the best year in 2017 that housing has witnessed since 2007, finishing off with a total of 1,263,400 authorizations. While 2017 was a great year for permits, they were just 64.9% of the 50-year average when taking into account the size of the U.S. population. This points to much more growth potential for 2018 and beyond.
Even though new housing starts demonstrate the most robust activity in that sector in over a decade, it is still well below demand. Homebuyers face the most competitive market in recorded history, according to industry professionals across the board. Low inventory, demographic shifts, and rising prices will cause frustration this spring and summer, as there are many more buyers than sellers. As I have reported in the past, the biggest drivers to the underbuilding has been higher costs, labor shortages, and zoning and regulatory barriers that have stood in the way of new home construction. Inventory has decreased for 42 consecutive months and is down 8.5% from last year. Millennials are reaching prime homebuying age; in 2020, the greatest proportion of that generation will be turn 30, just as baby boomers are looking to downsize. This has created especially fierce competition for smaller homes, the type of starter homes that most first-time buyers desire. This dynamic can be especially frustrating for young adults because they may be bidding for the same smaller home as someone from an older generation who can lean on the accumulated wealth from decades of homeownership.
But now against the backdrop of an overall construction market that is trying to shake off labor shortages in its quest for further growth, the Capitol Hill press reports that the widely-touted Trump infrastructure plan looks like it has been swept into the background for 2018, and is unlikely to happen. It seems that infrastructure legislation is an early casualty of Washington’s fixation on the November mid-term elections, and congressional leaders are signaling that Trump’s $200 billion federal infrastructure plan is all but dead for this year.
Of course, there is the very practical topic of how to pay for any proposed infrastructure initiative without resorting to usual Washington bookkeeping and scorekeeping trickery, as one Capitol Hill observer called it. Truckers and the U.S. Chamber of Commerce briefly floated a nickel-a-year increase in the fuel tax: 18.4 cents a gallon on gasoline, and 24.4 cents on diesel, which is unchanged since 1993. That trial balloon crashed and burned because of the no-tax pledge signed by most Republicans in Congress.
In more disappointing news, a planned infrastructure fund by the private equity firm Blackstone that was said to be creating up to $40 billion in private money has been slow to get off the ground. Saudi Arabia was supposed to be the fund’s largest backer, but they backed off, and the Saudi money was reported to amount to half of the $40 billion. Blackstone has since announced its goal is now $15 billion, but even that figure is suspect because of lukewarm returns on infrastructure investments.
We are not in a political environment where big, bold infrastructure programs are appealing, with mid-term elections just months away, and when deep concerns exist about the Republican majorities due to the number of retiring incumbents in the House. Despite those political issues, the fact remains that the Highway Trust Fund is still collapsing, and we need bold new thinking. According to the Congressional Budget Office (CBO), from 2021 to 2026, trust fund revenue is projected to total $243 billion. Outlays will amount to $364 billion, resulting in an imbalance of $121 billion. Each year during this period, the trust fund faces shortfalls of between $19 billion to $23 billion, the CBO says. And roads and bridges are only a part of the infrastructure discourse – there is still the issue of water, rail, communications and electrical infrastructure, and other parts of our vast systems that all face deferred maintenance and are badly in need of upgrading.
The only thing the White House has been able to produce on infrastructure this year is a vow to expedite the review and permitting processes for major U.S. infrastructure projects. It establishes a lead federal agency with a commitment to oversee any major projects, but with few details on how this will streamline complex deals. Under the current process, agencies may conduct their own environmental review and permitting processes sequentially, resulting in unnecessary delay, redundant analysis, and revisiting of decisions. Now federal agencies are conducting their processes at the same time. At least that was a step in the right direction, and welcome news in some quarters of the business community looking for any action on infrastructure.
But in the end, it is only real dollars that will solve the infrastructure dilemma in America; for now, our Congressional delegations are focused on getting re-elected and hoping to preserve the Republican majority. For them, that is their top priority, and major Trump initiatives like infrastructure, immigration reform, and other major policy matters that drove his campaign have been relegated to the back burner.
Fortunately, the ever-growing housing market and other segments of private development are shoring up the recovery in ready mixed concrete production, and this year is on track to be the best in terms of volume and pricing in over a decade.
About the Author
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pvillere@allenvillere.com. Follow him on Twitter – @allenvillere.