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On January 22, 2008, the U.S. Federal Reserve Board dropped its key policy-setting interest rate by 0.75 percentage points. The Fed’s rate cut was dramatic in two ways — (1) its timing, arising out of a special meeting only one week in advance of a regularly scheduled session; and (2) the degree, much bigger than most outside estimates had been expecting. As a result, the good times for non-residential construction will be prolonged and the floor in new housing markets may be reached earlier.
All of the projects shown in this report share the same common factors. They are all in the planning stage. They are mainly new projects but may also involve additions and/or alterations. Shopping centres, hotels, office buildings, medical buildings, educational buildings, libraries and museums, sports and entertainment complexes, industrial projects and government buildings will all be covered on a rotating basis.
The 2008 construction materials cost outlook depends on the supply-demand balance in world commodity markets, the ability of central bankers to provide adequate credit for normal business loans while the subprime mortgage losses are absorbed and buyer confidence, recently much depressed.
The areas of weakness in the U.S. economy are readily apparent in the latest labor force statistics. In terms of the year-over-year increase in employment, strength is apparent in only three sectors. Most of the other job sector categories are lackluster at best, or depressed at worst. Consumer sentiment has been rocked by lower home prices, high gasoline costs and, in a classic “which comes first” causal conundrum, uncertain job prospects.
According to the accompanying charts, a typical gymnasium had the largest year-over-year increase in construction costs in December 2007 (+5.1% on average for 25 major centers) among four type-of-structure categories monitored by RSMeans. In second place was an auditorium (+4.4%), followed by a library (+3.5%) and a fire station (+1.3%). As for the actual dollar-per-square-foot cost of construction, an auditorium is most expensive, followed by a fire station, then a library and a gymnasium.
The crisis in financial markets, which arose as an offshoot of subprime mortgage foreclosures in the U.S., is now having an impact on equities. Major stock market indexes are down by double digit percentages versus their peaks. Strains in the U.S. economy have become evident in several other sectors as well, beyond housing. Weaker labor markets are a prime concern. There is little doubt that the Federal Reserve will lower interest rates, maybe by as much as 50 basis points, at the end of January.
Reed Construction Data announced today that the value of construction starts in full year 2007, excluding residential contracts, totaled $299.504 billion, up 11.2% from full year 2006. On a month-to-month basis, starts increased 5.2% in December after two weak months in November and October. However, starts weakened at the end of 2007 with the final three months recording a 17.6% fall from the previous three months. This decline was more than the usual seasonal decline at the beginning of winter.
No one can rest easy about the economy until U.S. housing markets right themselves. Two of the major geographic regions in the U.S. are almost on the mend, while two others are still on the downslide. The Northeast region has had the smallest housing market decline and remains relatively the healthiest regional market in the country. The South, even in its reduced state, is by far the largest regional housing market, accounting for more starts than the other three major regions combined.
From a peak level of 2.292 million units of housing starts in January 2006 to their current level of 1.187 million units in November 2007, U.S. housing starts have plunged by 48%. Now for the good news. (1) Sales of existing homes are showing signs of stabilizing. (2) The number of unsold new homes has been on the decline since the midway point of 2006. (3) The dollar effect on top of the housing-price effect is stimulating Latin American, European and Canadian interest in resort properties.
How do you find a leak on a flat asphalt roof covered with gravel when the water just courses around under the gravel until it finds a hole?
