Last November, I predicted a stable year for concrete production in 2007, with total yardage “at least as strong as 2006.”

At that time, I didn't fully appreciate the impact of the spectacular flameout of the subprime mortgage industry and its impact on new residential construction. This phenomenon, coupled with other impacts like the looming resets on adjustable rate mortgages, or ARMs, that will continue to press homeowners for the next couple of years, creates a dark cloud of uncertainty for concrete production volumes in 2007-08.

Add to these woes the resurging high price of gasoline and the precipitous fall in home values that has wiped out the equity for many homeowners, thus killing the refinancing and home equity loan money that has fueled consumer spending. It points to a “perfect storm” for the new housing market.

Against this financial backdrop in the new housing market, it is becoming harder for us to predict the outcome of 2007. But we could see a year where concrete production falls as much as 10% to 15% from the record in 2006.

At the root of the storm is the subprime and ARM mortgage markets. The industry has boomed since 2001: Wall Street pooled $61 billion in sub-prime mortgages to borrowers with spotty credit into bonds sold into the fixed income markets that year. That spiraled up to $508 billion by the peak of the housing market in 2005, according to Inside Mortgage Finance.

Defaults are rising at such a fast clip, it almost brought Wall Street legend Bear Stearns to its knees as it faced huge exposure in subprime bond issues. Further up the credit scale, ARMs are such a significant component of the total mortgage market, that about $515 billion will be reset upward this year, and an additional $680 billion will be reset in 2008, according to Bank of America. This means ARM borrowers will be paying higher interest on more $1 trillion in outstanding mortgage debt by the end of next year.

Rising foreclosures

And the worst may still be ahead. “The largest part of the problem in the subprime space is ahead of us, not behind us,” warns David Lowman, head of mortgage lending at JP Morgan Chase. “Many borrowers who got home loans the past couple of years are still paying the low initial monthly payments and have yet to face the steeper adjustable rates that kick in after two or three years. Once they do, foreclosures are sure to rise.”

This fallout has impacted the home refinancing business, even as prudent, responsible borrowers make their mortgage payments on time. As the exotic mortgages have faltered, they have had a sweeping downdraft on home values, wiping out the equity in many homes that has allowed refinancing proceeds to fuel consumer spending.

At the peak of the housing boom in the third quarter of 2005, people were taking cash out of their homes at an annual rate of $709 billion, according to JP Morgan Chase. In the first quarter of 2007, that number had fallen to $178 billion.

What does it all mean for the new housing market? Single-family housing starts have declined a whopping 33% since early 2006, to a seasonally adjusted 1.2 million this past spring.

And don't expect much improvement in 2008. The pendulum has definitely swung the other way. The millions of new home sales that were financed with exotics in recent years are gone for the foreseeable future, leaving a glut of inventory that only the most creditworthy borrowers can purchase.

— Pierre Villere is president and managing partner of Allen-Villere Partners. E-mailpvillere@allenvillere.comor telephone 985-727-4310. Visit the web sitewww.allenvillere.com.