A Concrete Problem: Middle-Income Housing

Posted by: Peter Coy on June 9, 2006

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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.

Reader Comments

Sampson

June 9, 2006 9:46 PM

This is really getting out of hand.

Anita Nauman

June 10, 2006 2:39 PM

I found this article interesting. I guess everything is relative. A one-bedroom, 725 sq. ft. unit going for $420,000 in Irvine, California? As a realtor in Columbus, Ohio, this gave me a better perspective. I had become discouraged by how the cost of affordable housing in my city has increased dramatically over the last 5 years, but compared to Irvine, we're much better off. A $420,000 price tag in my city will still purchase a newer home in a golf course community from 3000-3500 sq. ft. with a .3 acre lot. Thanks for the new perspective!

Sally

June 11, 2006 8:31 AM

Can someone define "middle-class" income? If middle class is $30-70K, then $425K is way over the affordability price. Middle class cannot afford a 1-bedroom for $425K.

dan

June 12, 2006 3:00 PM

middle class in irvine means dual income college graduates.

erin

June 17, 2006 5:11 PM

Cement price increase or not, housing prices like the ones in Irvine are what drive a lot of people to places like Charlotte, NC, where what they paid for a one-bedroom will buy them an historic property with actual land attached.

Chad

June 25, 2006 12:20 AM

What's funny is that the current trend of $350K+++ one-bedroom condos require two decent incomes! Why on earth would well-earning couples want a one bedroom condo? To raise a kid or two in? Come on! Mass delusion!!!

Bill

July 9, 2006 2:43 PM

I live in Irvine, and real estate is amazing. Avenue One is actually one of the least expensive condo developments in the area. Remember, Irvine is surrounded by Newport Beach, Corona del Mar, Laguna beach etc. where a 3 bedroom house costs 2+ million. Finding a 1-bedroom condo under 500k isnt as easy as it should be.
Orange County, and Irvine for sure, is the home of the D.I.N.K. (Double-income, no kids). As a very boisterous business hub, Irvine has created a community where almost everyone there has a high paying job, so a combined family income of 100k+ is considered quite low.
Not an easy place to buy your first home!

Anon

April 26, 2007 6:58 PM

Funny I ran across this article about cement prices going up. Like everything else, I'm sure there are different qualities/grades of concrete that a builder can purchase. In Avenue 1's case they must have bought the cheapest cement available. nearly every slab has a fracture or crack in it and its looks older then some older surrounding buildings. I own a unit in Avenue 1 and while I enjoy living there the cement looks like an absolute shame for a half-million dollar price tag. The driveway of my parents 32 year home looks new and better then the brand new slabs poured at Ave 1 -

Jaguar27

February 1, 2008 2:51 PM

The Median HOUSEHOLD income in Irvine is only $85k pa. 90% of Avenue 1 is sitting empty, a while back, a one bed 602 sq ft unit would have cost $385K, I think they are now asking $329k, still way overpriced. The number of foreclosures in this complex aren't helping the Builder either.
Also, many People don't realize that if you live at this address your Kids will have to go to a Santa Ana School district School...
Oh, did I mention the $1200 pm Mello Roos and HOA fees?
This place is the butt of many jokes to all of us that live in Irvine....

Maggy

November 28, 2008 7:03 PM

I live in Irvine and own investment property in Columbus, OH, and I can tell you that it makes much more sense to rent here and buy houses out of state. Recent local layoffs have brought up apartment vacancies and pushed down house prices. Plus, many homes here require HOA dues on top of home prices. I'm hoping that the net migration of jobs and population out of the area will finally make housing affordable again.

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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.

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