Home Builder Labor Efficiency – Why Less is More

Jonathan ScottContruction, Home Sales, Housing Affordability, Housing Inventory

Home Builder Labor Efficiency - Why Less is More_Housing Tides

6 min read

A recent survey published in Professional Builder magazine showed homebuilders expect higher labor and material costs to be the biggest challenge they’ll face in 2018.  With the U.S. unemployment rate at its lowest level since late 2000, any labor efficiency gains that homebuilders can squeeze out of their existing workforce would be welcomed with open arms.

Boom and Bust

U.S. residential construction employment fell drastically in the wake of the housing boom and financial crisis of the 2000’s, dropping from 1.04M workers in mid-2006 to just 528k in early 2011 (a decrease of over 49%).  Housing construction fell further yet, with housing starts registering a decline of nearly 84% from the monthly peak of 198k in mid-2005 to a nadir of 32k in early 2009.

Housing Tides_Construction Activity Rises Graph

Efficiency Suffers

Construction labor efficiency worsened considerably as a consequence.  The stable relationship between labor and housing starts from 1986-2005 was such that the industry employed about six workers per monthly housing start, but this ratio increased as construction activity dropped faster than employment, reaching a level of fourteen workers per start in 2009.  Erosion of labor efficiency during a recessionary period makes sense, as homebuilders and construction trades that didn’t close shop would have to retain a certain number of workers, regardless of the decline in demand for their services. 

Workers are less efficient graph_Housing Tides

Both construction starts and labor totals have improved since then, but labor output hasn’t regained its previous level of efficiency.  Over the last year the industry has utilized labor to the tune of 7.6 workers per start and efficiency gains appear to have leveled out. 

Fall in Efficiency Unexpected

Is this due to the mix of homes currently being built?  With the number of multi-family units under construction at its highest level since the 1970’s, we’d expect labor to be more efficient than in recent history, not less.  National Association of Home Builders (NAHB) analysis shows that single-family housing is more labor-intensive than apartments, so at a time when the multi-family share of construction is relatively high we’d expect better labor efficiency and the industry to need fewer workers per unit started. 

Multi-family share has grown graph_Housing Tides

Too Many Luxury Homes?

Perhaps the lower labor efficiency is due not to the type of units under construction, but the size of those units.  Census Bureau data show that, outside of a temporary shift towards smaller units during the housing downturn, new homes have increased in size over the last several decades.  Whereas 66% of new homes built in 1999 were under 2,400 square feet, just 49% of homes built in 2016 were in this bracket.  Recent research from Trulia shows that the typical new home commands a 28% price premium over existing homes, with new home sizes explaining a portion of that premium. 

Homes are getting bigger graph_Housing Tides

Indeed, if we look at the real value of permitted units per residential construction worker (the value after adjusting for inflation[1]) we see that labor productivity has largely recouped any losses.  In other words, the value of housing built by each worker has rebounded to its typical level from recent past, though each home built requires more workers than we’d expect.

[1] Adjusted using the Bureau of Labor Statistics’ CPI-All Urban Consumers series to 2016 dollars

Real Value per worker graph_Housing Tides

What We Can Do

A move toward smaller new homes could be combined with technological innovation to further drive productivity gains.  There’s evidence that countries like Japan and those in Scandinavia that have embraced modular, off-site construction and smaller floor plans are able to produce more housing units per worker than in the U.S.  Meaningful gains in U.S. construction labor efficiency would surely benefit from adoption of these strategies.

With the U.S. for-sale housing supply representing just 3.1 months of supply in November and the share of first-time buyers at a historically low level, homebuilders that can execute a transition in their product mix toward smaller units would find a ready supply of buyers. Those buyers would welcome the lower price point, as the median U.S. home sold for $292k in November and homebuyers have been challenged by affordability in recent years.[1]  The findings discussed above suggest that these builders could also expect to increase labor productivity in the sense that each unit would require fewer workers. 

To be sure, any endeavor to construct smaller homes would require efforts by many parties, as there are costs and regulatory obstacles to building smaller, dense housing.  The latest publication of the “America’s Rental Housing” report from the Harvard Joint Center for Housing Studies concluded that “While local policymakers have little sway over the price of construction materials, they do influence the amount of land available for high-density development, the process needed to gain approvals, and the characteristics of housing that is allowed.”  Still, homebuilders that have lamented for years that they’re unable to find enough qualified workers to ramp up production can begin to take matters into their own hands; the residential construction industry could expand the number of homes being built with no increase in labor simply by embracing the smaller, more affordable units that this country so desperately needs. 

Labor efficiency is just one piece of the puzzle. Comprehensive understanding of housing market conditions requires review of multiple data sources, like those in the Housing Tides Index™.

[1] Redfin

 

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About the Author
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Jonathan Scott

Jonathan is the Head Analyst for Housing Tides. A key team member from the beginning, Jonathan has been instrumental in shaping the concept of and developing the methodology for Housing Tides. Jonathan is fascinated by the intersection of human behavior and economic outcomes and hopes that Housing Tides will help increase objective decision making by reducing cognitive bias. Jonathan studied economics at CSU.