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The soaring price of cement is having a disproportionate effect on lower-middle to middle-income families. Why? Because the denser housing that tends to get built for them uses lots of concrete, which is made from cement, sand, gravel, and water. Designs with lots of concrete are becoming so expensive to build that they’re getting out of the potential buyers’ price range, says Tim Sullivan, president of Sullivan Group Real Estate Advisors. Pictured here is Avenue One, a project by K.Hovnanian in Irvine, Calif. It has 60 units per acre, wrapped around a concrete, above-ground parking garage. The design works financially in Irvine only because land is fantastically expensive, with median single-family homes going for over $1 million. Sullivan Group says the price of the smallest Avenue One unit, a 725-square-foot one bedroom, is just under $420,000, which passes for affordable middle-class housing in Irvine.
I spoke with Tim Sullivan this week about the cement problem. He said that because of the high price of cement and concrete products, builders are putting more of their efforts into homes that are built primarily of lumber. These are single-family homes or town homes that tend to be aimed at higher-income families. Tall condo and apartment buildings made of concrete are so expensive to build that these days they're aimed almost exclusively at wealthier buyers, Sullivan says.
One building type that has been particularly hurt is the kind shown in the photo, the "podium" or "wrap" building. It is 3 or four stories high and is either built on top of a concrete parking garage (the podium) or, like Avenue One, wrapped around the garage (the "wrap".)
What's strange about this phenomenon is that only a couple of years ago, high-density housing was seen as the obvious solution for moderate-income families because land was so expensive. Well, land is still expensive, but now materials prices are blowing out the economics of high-density housing, which is often built in empty or underused lots in cities.
I looked up some materials prices on the Bureau of Labor Statistics website. Over the past two years, the price of lumber and wood products is unchanged, but the price of cement is up 29%. You can see how that would tip builders toward "stick-built" homes.
Footnote: Cement isn't just expensive; it's also in short supply. Michael Carliner, an economist for the National Association of Home Builders, said last month that "the problem of availability is still more severe than increased cost." Exacerbating the high prices and shortages:
*The explosive growth of China, which uses one-third of the world's cement output.
*Regulations that make it tough for cement manufacturers to increase capacity.
*Barriers against Mexican cement, which was supposedly "dumped" in the U.S. below cost. Although anti-dumping duties ended Apr. 1, there are still regional quotas on imports from Mexico.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.