Bold action is needed to overcome stagnant productivity growth.
There is a statistic that used to be discussed solely by homebuilding and housing economists. But in the last year, it has been getting a second look by macroeconomists interested in solving the largest economic challenge facing American families: the housing deficit. It’s the statistic that shows the lackluster productivity growth in the residential construction sector.
Productivity growth in homebuilding and remodeling has posted smaller than expected gains for decades. By my estimates, over the last 30 years, residential construction worker productivity has increased 13%. However, that pales in comparison to the 46% gain for workers in the overall US economy. In other words, productivity growth in homebuilding and remodeling has only been 1/3 of that for the rest of economy since the early 1990s.
Is it possible that this is a data measurement issue? Two recent research papers from separate teams of economists at the Federal Reserve and the University of Chicago eliminate this option, demonstrating that the lag is very real.
What could be the cause? Currently, there is no clear answer. One argument suggests that the techniques for building homes, and in particular site-built construction, have not changed very much over the last few decades. This is certainly a possible explanation.
Alternatively, some academics claim “monopoly power” for large builders means there is no incentive for the industry to invest in and achieve productivity gains. I find this claim lacks merit. The supposition itself is false given that there are 50,000 homebuilding and more than 90,000 remodeling companies in the US. That is hardly evidence of concentrated market power.
Turning to another explanation, I have argued that the growing regulatory policy cost burden on builders and remodelers has restrained productivity gains. For example, research from the National Association of Home Builders (NAHB) has found that for a typical newly built home, more than $90,000 of additional cost is generated by regulatory policy during lot development and home construction. This research also shows that these regulatory costs have been growing considerably faster than inflation over the last decade.
The more regulatory costs and other government burdens, the harder it is to build, thereby reducing productivity and offsetting gains from technology and other factors. This seems a natural and intuitive explanation for the lagging productivity growth in our industry.
So, what can be done? To increase housing supply, reduce the housing deficit, and improve housing affordability conditions for buyers and renters, I see two broad approaches for industry improvement. From a defensive perspective, the residential construction sector needs to continue to fight inefficient, costly and unneeded regulatory costs imposed by politicians unconcerned with who will pay for their rules and mandates.
And in terms of moving the ball forward, on the offensive side, homebuilding and remodeling needs to embrace and foster innovation whenever and wherever market forces will permit.
An obvious area for some economic gains in the decade ahead is in offsite construction. Using Census data, NAHB Economics estimates that offsite single-family construction made up just 3% of industry output in 2022. That’s actually down from the 7% to 8% range in the late 1990s. (It should be noted that the Census data likely understates true market share for offsite, but that’s a separate measurement topic – the decline in share according to this consistent definition makes the larger point).
So, just regaining prior decades’ market share would offer improvement for the industry in terms of housing supply, benefiting the economy and helping to address the ongoing skilled labor shortage.
The NAHB Building Systems Councils, and other organizations, are working on both of these approaches for improvement – fighting the good advocacy fight to reduce government burdens and discussing ways in which builders can take advantage of offsite construction to improve their business, lower cost, and deliver homes to American families.
A singular, physical example of these efforts is the annual HUD-NAHB Innovative Housing Showcase, where a variety of offsite, market-based solutions are shown on the National Mall to those who need to see them most – policymakers in Washington, D.C.
The event happens every Spring, and this year’s event is scheduled for June 7-9. For more information go to https://www.huduser.gov/portal/ihs.html
Dr. Robert Dietz is Chief Economist for the National Association of Home Builders. Find him at: https://www.linkedin.com/in/robertddietz/.
