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Economist says market rebound to be slower

Edward Sullivan, chief economist with the Portland Cement Association is no longer bullish on a fast rebound for the industry, based on his assessment of general economic conditions and the housing market. Speaking at the World of Concrete in Las Vegas, he said that he believes that construction-market gains – and thus, aggregates and cement market gains – originally forecast for 2011 will not transpire until 2012, or beyond.

Housing starts are not expected to record significant volume gains during 2011, according to Sullivan. Slow growth in employment, coupled with a continuation of tight lending standards will likely result in only modest year-over-year gains in home sales. On the supply side, foreclosures are expected to equal 2010 levels – adding more than one million bank possessed properties to the market.

His assessment suggests inventories will remain elevated and downward pressure on home prices will remain in place. These conditions will send a clear signal to homebuilders to restrain building activity in 2011. Regional disparities in the recovery process will exist. PCA believes hard hit areas such as Nevada, Arizona and Florida will be among the last to join a substantive housing recovery

The expected growth of residential construction will vary considerably by region. “Keep in mind, as the recovery unfolds it is important not to be misled by growth rates,” Sullivan said. “Given the magnitude of declines, double-digit growth is expected in many markets, but on volume basis, much of the Southeast and Southwest will remain weak through 2011 despite the potential of high rates of growth.”

The housing recovery is beginning to show signs of emergence in the interior U.S. This region did not fully participate in the housing bubble and subsequent overbuild. In addition, the central U.S. has benefited from an economic tailwind due to higher commodity prices. In a corridor from the Dakotas to Texas, this region with the lowest home repossession rates and relatively strong labor markets is still expected to lead the housing recovery.

“From the Great Lakes states down into the Ohio Valley, these states did not fully participate in the frothy speculation that ran up home prices as seen in many coastal markets; however, the region did fully participate in the exotic mortgage trend,” Sullivan noted. “Given the region’s exposure to job losses, particularly manufacturing, the foreclosure rates in this region have rivaled that of the bubble states. This foreclosure overhang is depressing prices and keeping a lid on new home construction. Home prices in some of this region’s states likely were not inflated going into the recession, but that did not keep prices from falling due to foreclosures. Given this, home affordability is favorable and will likely assist in the recovery.”

However, he observed, it is not until sustained job growth is achieved can the distressed home overhang be eased. For this reason, recovery is expected to emerge in many of these states in the latter half of 2011 with more sustained growth in 2012.”

The Southeast and Southwest housing markets remain in recession with new home construction trends once again approaching previous lows following the slight run-up during the home buyer tax credit expiration. Foreclosures continue to add inventory to overbuilt markets which further depress prices.

While affordability has corrected, possibly over-corrected in some locales, weak labor market offer little on the demand side to bring down inventories. Despite increased job growth expected to emerge in 2011, the large volume of distressed homes and large shadow inventory is expected to keep a lid on new home construction throughout 2011 and delay the recovery until 2012. Longer-term however, these markets are expected to be growth leaders given their favorable demographic trends and already lean inventories in terms of new home construction.

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