Housing cycle may have peaked this year

By |  November 13, 2017

The outlook for the aggregate industry remains the same – solid growth this year, a pause next year and renewed growth in 2019.

Of the three major segments, housing should have the best outlook since we have growing employment, low interest rates and growing household formation.

But something has changed: There is no housing boom; just a slow, steady climb. We’ve said before that 2017 may be the peak for this housing cycle.

The main headwinds are very high housing prices and low savings for younger buyers. Unless we go back to 3 percent down payments, there just aren’t enough qualified buyers to push new home sales much higher. In fact, our view is that new home sales will decline in 2018.

Nonresidential building is also doing great. Activity is increasing in most areas, even as structural changes cast doubt on further gains. The increase in employment and plenty of financing have helped to boost building activity in the past three years.

Going forward, there are enough construction contracts in 2016 and 2017 to keep activity close to the current level. The biggest negative is the fading prospects for shopping malls owing to the Amazon effect.

The strongest outlook is for nonbuilding. Many states are increasing their gas taxes, and many have plans for increased infrastructure work. The federal government will also be a positive, although not as much as we thought a year ago. With tax reform taking center stage, the best we can say is that corporate tax rates will drop; everything else is “negotiable.”

The chart shows the ratio of aggregate consumption to population. This ratio is often used as a rule of thumb, with about 7 tons of aggregate per capita. So if you tell me an area has 1 million people, I will think it probably uses about 7 million tons of aggregate per year. Notice how high the ratio was in 2005 to 2007. Those were the bubble years. The ratio is now about 7.5, well within the normal range.

Regionally the variations are not as great as in the past. That is, almost all areas of the country are doing alright and few are in a boom/bust situation. The dark clouds of a debt crisis hang over several states (Illinois, New York, California and some others), waiting to strike at any time – but not this year. The energy states seem to be adjusting to lower oil prices better than we thought.

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