In Critical Condition


February 1, 2008

In Critical Condition

Despite attempts by various spin doctors to perform CPR on America’s perception of the current housing market, 2007 demonstrated that an acute and chronic affliction has struck the residential sector.

Because residential construction serves as the end use of about one-third of the aggregates produced during any typical year, a significant downturn in its fortunes reverberates throughout the aggregates industry. When evaluating the implications of the drop in housing starts, consider that each start represents approximately 400 tons of aggregates. It’s no wonder that residential market concerns have been a common ailment reported by numerous publicly held aggregates companies.

The big question is whether the residential market has hit its bottom. The answer depends greatly on who you ask. Although the National Association of Realtors continues to paint a positive picture with regards to pent-up demand, its own data contradicts the happy talk. For example, the group reported last October that the current home inventory of 4.4 million homes would take 10.5 months to sell at the existing sales rate.

The New York Times touts that renting has been a better choice than buying in markets such as Los Angeles, Las Vegas, and Miami during the last two years. In fact, it notes that housing prices in the Los Angeles market would need to increase 5 percent during each of the next five years for a typical buyer to do better than a renter.

As our economics expert, Daryl Delano, points out in this month’s AggMan Outlook (click here), the median price of a new single-family home sold during October 2007 was 13 percent lower than one year earlier. Existing home values didn’t diminish as rapidly, but a 5.1-percent decrease in value — the nationwide average — is something no one should take lightly.

What should aggregates managers do? First, consider the short-term implications for your business. Look at your customer base and, to the extent possible, adjust your processing plant to focus on other opportunities as they exist in your local market. Next, keep in mind that history repeats itself. Remember the dynamics of the boom-bust cycle of the 1980s. The 2000-05 residential boom lasted longer than its predecessor, so prepare for a longer period of recuperation. Finally, determine the right prescription for preventative health. Monitor the vibrancy of the residential, non-residential, and public works sectors on a regular basis. And when you’re lobbying for transportation funding, ask legislators for their support in all three segments. If predatory lending practices had been targeted sooner, the residential market might be in healthier condition.

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