Construction Outlook - GE Capital
Total construction put-in-place improved +1.5% year-over-year in 4Q11 to $204.7 billion with improvements in residential and nonresidential building construction offset by a slight decline in nonbuilding construction. Small but consistent quarterly improvements in virtually all metrics give positive momentum for 2012.
Residential housing statistics showed positive yearover- year comparisons in the fourth quarter on easy comparisons. While housing affordability has reached cyclical highs, an abundance of inventory, high unemployment and economic uncertainty prevent buyers from making large purchases.
According to the U.S. Census Bureau, total housing starts increased +24.5% YoY in 4Q11
to 149,200 after increasing +5.4% YoY in 3Q11. Mild weather in November and December
contributed to strong results. This is the second consecutive quarter since 2Q10 that
we’ve seen year-over-year increases in total housing starts.
On a seasonally adjusted annual rate (SAAR), starts improved +9.4% sequentially to an
average of 673,000 starts, the highest level since 3Q08.
Total housing starts increased +3.5% in 2011 to 607,700 units after increasing +6.0% in
Likewise, housing permits increased +14.8% YoY in 4Q11 to 151,500 units after increasing +6.6% YoY in 3Q11. On a seasonally adjusted basis, permits increased +10.4% QoQ to SAAR of 667,700 units, the highest level since 3Q08. Total housing permits increased +1.0% in 2011 to 610,900 units after increasing +5.7% in 2010. Total residential construction put-in-place increased +3.3% YoY in 4Q11 after declining -1.9% YoY in 3Q11. The is the first quarter since 2Q10 in which residential construction has improved on a year-over-year basis. On a seasonally adjusted basis, total residential construction put-in-place increased +4.7% from the prior quarter. Total residential construction put-in-place declined -1.1% in 2011 after declining -2.9% in 2010.
Single-family housing starts increased +4.7% YoY in 4Q11 to 100,100 units after
declining -1.8% YoY in 3Q11. On a SAAR basis, starts increased +10.3% sequentially from the third quarter to an average SAAR of 439,300 in 4Q11. Strong starts in November and December due to mild weather contributed to good results.
Single-family housing starts declined -8.7% in 2011 to 429,900 after increasing +5.9% in
New single-family construction put-in-place (as reported by the U.S. Census Bureau)
increased +2.4% YoY in 4Q11 to $27.4 billion after declining -3.9% YoY in 3Q11. On a
seasonally adjusted basis, new single-family construction increased +2.6% from the
Single-family construction put-in place declined -5.2% in 2011 after increasing +4.9% in
The U.S. Census Bureau reported sales of new single-family homes increased +3.0% YoY
in 3Q11 after increasing +2.7% YoY in 3Q11. On a seasonally adjusted annual basis, new
home sales increased +4.6% from the third quarter to an average SAAR of 309,300 in
4Q11. New home sales remain near cyclical lows.
New home sales declined -6.5% in 2011 to 301,000 units. New home sales declined
-13.9% in 2010.
Average sales prices of new homes declined -7.0% YoY and declined -1.9% from 3Q11 to
average $257,000 in 4Q11. This is the fourth consecutive quarter and the 15 out of the
last 18 quarters in which average new home sales prices have declined.
New and existing home inventories continue to decline which is an important step
towards a healthy residential housing market. New home inventories declined -18.7%
YoY in 4Q11 and -3.9% QoQ to 157,700 units or 6.9 months.
The National Association of Realtors reported that single-family existing home sales
increased +8.2% YoY in 4Q11 after increasing -18.6% YoY in 3Q11. The SAAR increased
+6.0% from the prior quarter to 3.9 million units. Single-family existing home sales
increased +2.1% in 2011 after declining -4.2% in 2010.
Average single–family existing home prices continue to deteriorate, declining -4.3% YoY
and -3.7% QoQ in 4Q11. Home prices declined -2.9% in 2011 after increasing +1.7% in
Existing single-family home inventories declined -16.5% YoY in 4Q11 and declined
-12.8% QoQ. Existing single-family home inventories stood at 6.9 months in 4Q11 vs. 8.4
months in 3Q11 and 9.2 months in 4Q10.
The Pending Home Sales Index as reported by the National Association of Realtors
increased +6.3% YoY in 4Q11 to an average Index of 78.3 after increasing +10.5% YoY in
3Q11. On a seasonally adjusted basis, the Index averaged 94.9 in 3Q11, up +6.6% from
The Pending Home Sales Index increased +0.6% in 2011 after declining -5.9% in 2010.
The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) has
shown drastic improvement in 4Q11, giving hope for continued positive news in 2012.
The HMI is a weighted, seasonally adjusted statistic derived from ratings for present
single-family sales, single-family sales in the next six months and buyers’ traffic. The
4Q11 present conditions index is up +29.5% from 3Q11 and +21.3% from a year ago
while the next six months index is up +29.8% from 3Q11 and +22.9% from a year ago.
While +29.8% improved from 3Q11, buyers traffic in 4Q11 was flat from a year ago.
The multi-family housing market continues to outperform the single-family market.
Housing starts in structures with more than 1 unit increased +102.9% YoY in 4Q11 to
49,100 units after increasing +25.8% YoY in 3Q11. The 4Q11 average SAAR of 203,700
starts is up +7.4% from the previous quarter. SAAR of multi-family housing starts is now
at its highest level since 3Q08.
Multi-family starts increased +53.5% in 2011 to 177,800 starts after increasing +6.3% in
New private multi-family construction put-in-place increased +12.2% YoY in 2Q11 to $1.3
billion after increasing +10.0% YoY in 3Q11. On a seasonally adjusted basis, multi-family
construction put-in-place increased +3.6% from the prior quarter.
New multi-family residential construction put-in-place increased +0.4% in 2011 after
declining -48.6% in 2010.
Renovations and Improvements
The renovation market continues to benefit from the decline in new and existing home
sales. Expenditures on renovations and improvements increased +3.2% YoY in 4Q11
to $28.8 billion after declining -1.3% YoY in 3Q11. On a seasonally adjusted basis,
renovations and improvements improved +7.0% from the prior quarter.
The renovations market improved +2.8% in 2011 to $114.7 billion after declining -0.4% in 2010.
In addition, the Remodeling Market Index as reported by the National Association of
Homebuilders increased +12.3% YoY to 46.6 in 4Q11. While both the Current Conditions
Index and Index of Future Expectations improved and are at their highest levels
since 4Q06, they continue to languish below 50. An RMI below 50 indicates that more
remodelers report market activity is lower (compared to the prior quarter) than
report it is higher.
Future expectations have not exceeded current conditions since 1Q07. Future
expectations consistently exceeded current conditions from 2003 through 2005.
While the Index declined for all components, owners continue to heavily favor minor
additions and alterations (vs. major remodels or maintenance and repair) while rentals
favor major additions alterations (vs. maintenance and repair and minor remodels).
The Midwest outperformed the balance of country on nearly all housing metrics while
the Northeast region underperformed on all housing metrics. The South and West
regions show gains in leading indicators such as permits and starts.
Housing Market Outlook
After a dismal year for housing industry economists in predicting 2011, they continue to
fine-tune their 2012 estimates. 2012 average total housing starts estimates now stand
at 703,000 units, a +15.7% increase over 2011. Estimates sit in a pretty tight range and
vary from a low estimate of 699,000 starts from the Mortgage Bankers Association to a
high estimate of 708,000 from Fannie Mae.
2013 industry average estimates are 901,000 starts, a +28.2% increase over 2012.
Estimates vary greatly and range from 813,000 (Mortgage Bankers Association) to
986,000 (National Association of Realtors).
2012 industry average single-family housing starts estimates now stand at 477,000
starts, a +11.1% increase over 2011. Estimates for 2012 single-family housing starts
range from a low of 443,000 from the Portland Cement Association to a high of 499,000
from the National Association of Home Builders.
2013 estimates average 617,000 starts, a 26.3% increase over 2012, and range from
586,000 (Mortgage Bankers Association) to 660,000 (National Association of Home
New single family home sales estimates now average 343,000 units for 2012, a 13.6%
increase over 2011, and range from a low estimate of 324,000 (Mortgage Bankers
Association) to a high estimate of 360,000 (National Association of Home Builders).
2013 estimates average 459,000 units, a 33.8% increase from 2012, and range from a
low estimate of 395,000 (Mortgage Bankers Association) to a high estimate of 506,000
(National Association of Home Builders).
Nonresidential Building Construction
U.S. Department of Commerce reported nonresidential building construction putin-
place increased +3.4% YoY on easier comparisons to $69.5 billion in 4Q11 after
declining –1.3% YoY in 3Q11. This is the first quarter since 4Q08 that nonresidential
building construction has seen year-over-year growth. On a seasonally adjusted basis,
nonresidential construction declined a modest -1.6% from the previous quarter.
Nonresidential building construction declined -4.1% in 2011 to $275.7 billion after
declining -23.2% in 2010.
Lodging, amusement & recreation and office markets continue to see the largest
year-over-year declines with healthcare exhibiting weakness in 4Q11. Manufacturing
and commercial construction seem to have turned the corner and are showing healthy
year-over-year increases in 4Q11.
The American Institute of Architecture’s Architecture Billings Index Billings Index
averaged 51.1 in 4Q11, an improvement to the 3Q11 average of 48.1. This comes after
two consecutive sub-50 quarters. A reading of greater than 50 indicates an increase
in billings. The Index is considered a 9 to 12 month leading indicator of construction
Nonresidential Nonbuilding Construction
Nonresidential nonbuilding construction put-in-place declined -0.7% YoY to $72.4 billion
in 4Q11 after declining -0.7% YoY in 3Q11. On a seasonally adjusted basis, nonbuilding
construction increased +3.1% QoQ in 4Q11.
Nonresidential nonbuilding construction declined -0.1% to $264.4 billion in 2011 after
declining -2.9% in 2010.
The current transportation bill expired in 2009 and is currently in its eighth extension
which expires on March 31, 2012. Given the tight fiscal condition of most state budgets,
wildly opposing House and Senate proposals and a Congress seemingly-focused on
campaigning, we expect that Congress will pass another extension. The end-result is no
new federally-funded projects and no meaningful increases in nonbuilding construction
expenditures through at least 2013.
The exception is in sectors which are largely privately funded such as power
construction. Increases in natural gas fracing as well as oil exploration has resulted in
demand for both equipment and services. Those sectors which see large amounts of
federal funding such as highway and street, transportation, sewage and waste disposal
and water supply continue to see declines.
According to the U.S. Department of Labor, the construction industry employment
gained 36,000 jobs or +0.6% YoY in 4Q11, the second consecutive improvement since
1Q07. Improvements in residential and heavy/civil construction employment were offset
by slight declines in the nonresidential construction employment market.
On a seasonally adjusted basis, construction industry employment added 18,700 jobs
in 4Q11 or +0.3% of the work force from 3Q11. Construction employment averaged 5.6
million in 4Q11.
On a seasonally adjusted basis, employment in the residential building industry
increased for the first time since 2Q06. Residential building construction employment
increased +1.7% QoQ in 4Q11 or approximately 9,400 jobs. Actual residential
construction employment in 4Q11 showed an improvement of 7,800 jobs YoY or +1.4%
of the work force.
Nonresidential building construction employment declined slightly -0.2% QoQ on a
seasonally adjusted basis. Actual employment in the nonresidential building industry
increased +0.7% YoY. Nonresidential building construction employment has remained
relatively stable near the cyclical low over the last 8 quarters.
Heavy/civil construction employment improved +1.1% in 4Q11 over the prior quarter.
Actual employment increased by modestly over the prior year. Heavy/civil construction
employment continues to hover around current levels since the expiration of the
transportation bill in 3Q09.
New construction equipment orders as reported by the U.S. Census Bureau, continue
to improved 4Q11 increasing +27.6% YoY to $14.0 billion after increasing +37.8% YoY
in 3Q11. On a sequential basis, orders increased +4.9% QoQ in 4Q11 after increasing
+10.4% QoQ in 3Q11. New orders now exceed cyclical highs in 3Q07.
New equipment orders totaled $49.9 billion in 2011, a +38.2% improvement from 2010
Shipments of construction equipment also continue to improve, increasing +34.0% YoY
in 4Q11 to $13.4 billion after increasing +44.4% YoY in 3Q11. On a seasonally adjusted
basis, shipments increased +14.2% QoQ.
Construction equipment shipments totaled $47.4 billion in 2011, a +38.5% increase over
New orders continue to outpace shipments which demonstrates a positive future
outlook by dealers and end-users.
As new orders and shipments increase, manufacturers continue to increase inventories
which averaged $5.9 billion during 4Q11. This is a +4.1% increase versus 3Q11 and
a +24.5% increase over 4Q10. Because of strong retail shipments, the inventory-toshipments
ratio remains at reasonable levels. The inventory-to-shipments ratio averaged
1.31 months in 4Q11 down slightly from 1.33 months in 3Q11.
Unfilled orders (backlogs) in 4Q11 increased +5.4% from 3Q11 and +37.9% YoY to
average $10.4 billion in 4Q11 indicating a more positive outlook for the industry as some
longer-term orders get placed on the books. This is the highest level of backlog since
The market for used equipment continues to improve with lower inventory and
Ritchie Brothers Auctioneers gross auction proceeds reached $1,040 million in 4Q11,
+30.2% higher than 4Q10. This is largely due to the fact that a number of auctions which
took place in 3Q10 took place in 4Q11.
The rental houses also are seeing improvement in both sales and margins. At United
Rentals, revenues from used equipment sales increased +132.5% YoY in 4Q11.
Sales of used rental equipment at RSC Holdings Inc. increased +2.2% YoY in 4Q11 with
gross margins of 41%, compared with 33% gross margin in 2Q11 and 38% in 3Q11.
At H&E Equipment Services, used equipment sales increased +21.4% YoY in 4Q11.
The rental sector is seeing continued improvement in rental volume, rental rates, time
utilization and used equipment sales. The uncertainty in the end markets creates a
situation where end-users favor the flexibility of renting rather than owning.
In UBS’s Rental Equipment Industry Survey #107, 68% of branch managers reported
conditions “better than last year” in January while 12% reported conditions “worse
than last year”. This is worse than the results from three months ago where 75% of
branch managers reported “better than last year” conditions and 7% reported “worse
than last year” conditions. Even so, the survey marks the 22nd consecutive month of
improvements in business conditions.
Branch managers were also asked about rental rates in January compared to December.
35% reported “improved” rates, 53% cited that rates “stayed the same” and 11%
reported that rates “deteriorated”. This is worse than the October survey in which 42%
reported “improved” rates and only 5% reported that rates “deteriorated”.
United Rentals saw rental revenue increase +18.5% YoY in 4Q11 as a result of a +6.7%
YoY increase in rental rates, +15.0% YoY increase in volume of equipment on rent and
improved time utilization to 70.8%.
At RSC, rental revenue increased +27.2% YoY in 4Q11 as a result of a +20.7 YoY increase
in rental volume, a +6.5% YoY improvement in rental rates and average fleet utilization to 71%.
H&E Equipment Services reported a +24.3% YoY increase in rental revenues on a +6.5%
YoY increase in rental rates. Time utilization (based on units available for rent) was 67.3%
in the 4Q11 as compared to 62.7% a year ago.
According to the Bureau of Labor Statistics, the Producer Price Index (PPI) Construction
Materials increased +4.4% YoY in 4Q11 after increasing +4.2% YoY in 2Q11. Prices of
construction materials increased +3.4% in 2011 after increasing +2.8% in 2010.
Prices of cement, concrete, ready-mix concrete, lumber and plywood, gypsum and
construction sand and gravel remained at fairly stable levels. Prices of asphalt paving
mixtures and block and fabricated metal products continue to show significant yearover-
year increases. Prices of copper fell -6.4% from al-time highs.
In 2012 and 2013, prices of all building materials are expected materials are expected
to remain relatively at or about current levels. In 2014 and 2015, prices of residential related materials such as lumber and gypsum are expected to increase significantly due
to increased demand related to the anticipated return of the residential housing market.
The price of copper are expected to decline in 2013 and 2014 off 2011 highs.
According to the U.S. Geological Survey (USGS) Mineral Resources Program (MRP),
shipments of Portland and blended cement increased +7.4% YoY in 4Q11 after
increasing +5.2% YoY in 3Q11. Shipments declined -2.4% YoY in 2Q11.
Portland and blended cement shipments totaled 72.2 million metric tons in 2011, a
+3.1% increase over 2010.
Clinker production in the U.S. made up for an otherwise flat year in 4Q11 and increased
+10.9% YoY in 4Q11. For the year, clinker production totaled 61.8 million metric tons in
2011, a +2.3% increase over 2010.
The price of cement continued to decline on a year-over-year basis with the decline in
cement shipments and clinker production. PPI cement declined –0.3% YoY in 4Q11 after
declining –1.0 % YoY in 3Q11.
For the year, cement prices declined -2.5% in 2011 after declining -6.4% in 2010.
Ready-mix concrete prices continue to remain relatively stable. PPI Concrete increased
+0.2% YoY in 4Q11 after declining –0.4% YoY in 3Q11. Prices continue to rise throughout
the quarter suggesting that prices might be firmer in 2012.
Prices of ready-mix concrete declined -0.6% in 2011 after declining -2.4% in 2010.
Disclaimer: Although General Electric Capital Corporation (“GE”) believes that the information contained in this newsletter has been obtained from and is based upon sources GE believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. GE makes no representation or warranties of any kind whatsoever in respect of such information. GE accepts no liability of any kind for loss arising from the use of the material presented in this newsletter. This newsletter is not to be relied upon in substitution for the exercise of your independent judgment or legal advice.
Source: GE Capital