Over the past year or two, I have written from time to time about various aspects of the housing recovery, with a focus on how critical it is to the future of our industry. New home construction has always been an important component of overall ready mixed concrete volume, and the driver for collateral products like precast, block, pavers, and other manufactured goods that are pulled through the distribution chain as a result of new housing construction.
There is no doubt that housing has made a comeback over the last year, and more strongly in some markets than others. As I have written previously, markets across the country such as Phoenix, parts of California, Texas, and Florida have witnessed new housing start recoveries that have caught some producers by surprise — and even left some short on mixer trucks and qualified CDL drivers. What’s more, prices have spiked sharply in many markets, bringing ever more buyers flying off the benches and jumping in, fearing they have missed the bottom of the value equation.
The academic debate in the financial world is whether or not this spurt of activity is sustainable. Some point to the changed credit markets, where sub-prime loans that were a key factor in propelling the last housing boom to new heights have gone by the wayside, limiting buyers to those with a substantial down payment and excellent credit, or the ability to pay cash. Others point to the increase in interest rates, which no doubt are trending upwards as unemployment comes down, as the specter of inflation presses the Federal Reserve to tighten monetary policy as early as next year.
But the one force that propels housing construction, and has for decades, is plain old population growth and household formation, and that is not going away. While household formations took a breather in the recent recession, they have rebounded, and the statistics are very telling.
Today’s housing market: The facts and figures
The impact of the housing slump set up today’s dynamics. The country added around 1.3 million new households every year for the 10-year period ending in 2007, after which household formation fell to more than half that level. New home construction ground to a halt in 2008 as home builders were sidelined by rising volumes of foreclosures and other distressed sales.
Financial news sources are consistently reporting that those bullish on housing see the slow economic recovery releasing pent-up demand with rental housing leading the way, followed by home purchases. More young adults, many of whom are among the 65 million "echo" boomers (born to baby boomers between 1981 and 1995) are moving out of their parents' homes and into apartments, while others that had delayed home purchases during the bubble are ready to buy.
Meanwhile, those who are bullish on housing still see too few homes being built, even after accounting for the so-called "shadow" inventory we keep hearing about. One well-known housing research group reported that population growth will require 14 million additional housing units this decade — around three-quarters of them single-family homes — and it is estimated that only 5.7 million of those units will be built by 2015. This means the U.S. would need to add two million homes a year over the last four years of the decade, spurring a big boost of construction that would ripple through the economy.
Remember, we are enjoying record affordability fueled by low prices and mortgage rates, but this is only part of the reason housing has picked up today. Equally important is that home prices have stopped falling, convincing consumers that they are no longer at risk of finding themselves in a home whose value continues to fall, a major factor in the housing market freeze of the past recession. Also, investors have played key roles by picking up the slack for debt-constrained consumers. By converting homes from the oversupplied for-sale market into rentals, they have added to the shortage of houses available to be purchased.
Several housing industry experts are saying too much attention has been paid to declining homeownership rates, and not to declining vacancies. It is the relationship of occupancy and shelter to the available housing stock, whether rented or owned, that will drive new housing starts for years to come. From my perspective, expect to see a robust new home construction market growing annually for the next several years.
Pierre Villere is president and managing partner of Allen-Villere Partners. Contact him at email@example.com or telephone (985) 727-4310. Visit www.allenvillere.com.