Considerable Economic Benefits Derived from Multifamily Housing, NAHB Finds
More than 1.93 million new housing units are projected for 2005, making housing one of the largest engines of economic growth in the United States. As part of our continuing efforts to provide builders with hard data that can help them fight NIMBYism, NAHB recently looked at how the construction of multifamily housing contributes to economic growth across the country.

Probably the most obvious impact of multifamily construction on the economy is the employment of construction workers to build the structures, but there are broader impacts which extend to other industries as well. For example, jobs are generated in the industries that produce and distribute steel, concrete, lumber, lighting fixtures, heating equipment, and other products that go into an apartment or condo building. Additional jobs are generated for professionals, such as architects, lawyers, engineers, lenders, real estate agents and the many others who provide services used by multifamily builders.

Across all industries in 2005, NAHB estimates that building one average apartment unit generates a total of 1.29 jobs.

The wages and salaries earned in the jobs generated by multifamily construction are subject to income and Social Security taxes. Profits earned by owners of the businesses are similarly taxed. Beyond this, states often impose sales taxes on materials sold to builders, and many local jurisdictions levy fees for approving building permits, extending utility service, and for school-related or other impacts attributed to residential construction. 

At the federal, state, and local levels combined in 2005, NAHB estimates that  building an average multifamily unit generates $30,807 in taxes and other government revenue.

These estimates are designed to capture the impact of home building on the aggregate economy and are based on national averages. As such, they may not perfectly reflect the situation in any specific state or local area. Key variables such as the mix of industries present, wage rates, and the value of an average new multifamily unit can be quite different in different parts of the country. Areas where the production of construction materials accounts for a large share of employment may be strongly impacted by the strength of multifamily construction at the national level.

Revenue for particular state and local governments depends on the types of taxes and fees they have adopted, the items subject to those taxes and fees, and the relevant tax and fee rates. These all vary considerably across the more than 87,000 state and local jurisdictions in the U.S. NAHB estimates the economic impact of multifamily construction at the local level using a somewhat different procedure.  

Jobs and Income

The wage, profit, and employment impacts of building an average single-family and an average multifamily housing unit are summarized in Table 1. The jobs are expressed in “full-time equivalents," where one full-time job means that the labor required is sufficient to keep one worker employed full time for one year. In total, one average multifamily unit generates 1.29 of these full-time equivalent jobs. Just over half of them (0.68 per multifamily unit) are in construction. 

In the construction industry, there are many small businesses with no payroll—sole proprietors— often specialty trade contractors. In fact, the most recent statistics have shown that there are more than two million of these “non-employers,” although it’s impossible to say how many work in multifamily, or even overall residential, construction. Nevertheless, among the firms earning proprietors’ income and corporate profits (which include profits of S-corporations, some of which may be quite small) generated by multifamily construction, some share is attributable to small, individual entrepreneurs. Although such self-employing mom-and-pop operations are not technically counted as construction jobs, many people would probably think of them in that way.

To estimate the impact of such buildings on wages, profits, and employment at the  national level, NAHB’s main data source is the industry account information published by the U.S. Bureau of Economic Analysis (BEA). This is part of the accounting system that produces the official estimates of Gross Domestic Product, or GDP. 

Some of the key accounts used to generate the estimates are “input-output” tables, which divide the value of residential construction into inputs and “value added.”  These numbers are produced by BEA specifically for the purpose of assessing the impact of a particular industry on the U.S. economy.   Value added is itself broken into several components, including compensation of employees. Other BEA accounts can be used to turn these components into wages, jobs, proprietors’ income and corporate profits. The process is illustrated in Figure 1.

The estimates in Table 1 are based on construction value per unit numbers reported by the Census Bureau and averaged over the most recent twelve months of data available. Construction value is not same thing as price, because the final price of a multifamily housing unit includes the value of raw land as well as some other items, such as brokers’ commissions, that the Census Bureau excludes from the construction value. If we add these items back onto construction value, the estimates in Table 1 are based on an average apartment with a market value of  $112,277.  

Although brokers’ commissions are excluded in the accounting systems used by both the Census Bureau’s Manufacturing and Construction Division and BEA, a share of apartment buildings are sold through brokers, so adding a reasonable estimate for the commissions (while not having an extremely large impact on the final impact estimates) seems  preferable to ignoring them altogether. This is the reason brokers’ commissions are shown independently of construction value at the top of Figure 1. The estimates are based on NAHB discussions with brokers who sell multifamily properties.  

As mentioned, multifamily construction’s impacts on employment are broad-based and span several U.S. industries. In addition to actual construction jobs, building an average multifamily unit generates 0.24 full-time jobs in manufacturing, 0.13 in professional and business services, and 0.12 in wholesale and retail trade.

Fees and Taxes

The BEA national accounting system divides “value added” into three main
components. Two of these, “compensation of employees” and “gross operating surplus” include income for individuals and businesses that is, as everyone knows, subject to taxation. The third component, “taxes on production and imports” (TOPI), is itself a measure of taxation.  

The amount of tax and other revenue generated for government when an average multifamily unit is built is shown in Table 2.  The total is $30,807 per unit.

Calculating income and Social Security taxes from the wages, salaries, and businesses profits generated by residential building is relatively straightforward and based on effective tax rates calculated from IRS data. Effective personal income tax rates are calculated one income bracket at a time.   The average effective rates work out to 9.4% for federal income taxes and 2.4% for state and local income taxes. For businesses, whether proprietorships or corporations, effective rates of 35.0% (federal) and 6.2% (an average over all states) are used. The effective rate for Social Security taxes, whether paid directly by the employer or employee, is 15.2%. All of these effective tax rates are based on 2003 data, which is the most recent that is currently available.

For our purposes, the key items in TOPI are sales taxes and various construction-related fees imposed by state and local jurisdictions. These are estimated  separately, as described below. TOPI collected by the federal government is calculated from BEA accounts. This is relatively small, because most TOPI (nearly 82% in 2003) are collected at the state and local level. 

Sales taxes and construction-related fees on the average new house are estimated by using construction cost breakdowns from Professional Builder Magazine  published in April of 2004. These numbers are based on a relatively large sample and are quite recent. In most important respects, they are consistent with earlier cost breakdowns produced by NAHB’s Economics Group.

According to the Professional Builder breakdown, materials account for about 30% of the price of a new housing unit. An effective average sales tax rate of 5.27% is derived from aggregate BEA accounts and applied to this 30%.  The breakdown also shows that, on average, permit and impact fees account for a little over 2% of the price of a housing unit. This is also shown in Table 2.

Of the $30,807 in tax and fee revenue generated when an average multifamily unit is built Federal income taxes ($8,729 paid by businesses, $5,279 paid by employees), and Social Security taxes ($8,200) account for the largest share, but state and local income taxes ($1,904 paid by businesses, $1,392 paid by employees), construction-related fees ($2,762), and sales taxes ($1,777) are also substantial.

When to Use Which Numbers

Estimates of the number of jobs created in the U.S. by multifamily construction are often useful in discussions about national economic conditions. Through the last recession, for example, multifamily construction remained consistently strong. As employment during that period was declining in most industries, questions about how many jobs were being sustained by multifamily construction—and how many more could be created by building additional apartments—arose frequently.

Estimates of the revenue generated for government is useful for evaluating housing programs. The tax revenue generated by multifamily construction can help offset the cost of adopting a new multifamily production program or expanding an old one like the Low-Income Housing Tax Credit. Although current rules don’t allow Congress to consider many of these tax offsets officially when analyzing a program’s impact on the federal budget, it is nevertheless often useful to be able quantify the offsets for individual members of Congress or other interested parties.  The employment impacts of multifamily construction can also be useful when arguing in favor of housing programs, as the impact on particular industries may be of special interest to particular policy makers.

In order to estimate the impacts of multifamily construction at the state or local level, NAHB recommends using results from its local impact model. NAHB does not recommend adjusting the national impact numbers in an attempt to draw conclusions about  state or local economies. Not only do the national impacts include items that are clearly not relevant for a state or local analysis—such as federal income taxes—but stakeholders often approach national and local issues with different sets of questions they are trying to answer, and different preconceptions about what the numbers mean.

An example is whether or not the impact estimates include multiplier or “ripple” effects. Ripple effects occur when people who earn the income shown in Table 1 spend part of it, leading to more income in the industries that produce the items they purchase. The additional income leads to still more spending, generating another “ripple” of income, and so on. 

Although the direct impacts presented in this article include impacts in industries other than construction, they do not include ripple effects. At the national level, the ultimate impact of the ripples is linked to macroeconomic assumptions about the elasticity of aggregate supply—or, in less technical terms, about how much slack there is in the economy. This sets up a trade-off between inflation and real economic impacts like job creation. If slack is negligible, economic spending ripples will generate inflation but no jobs. Among macroeconomists and policy makers, there are likely to be competing assumptions and disagreement about the amount of slack present in the economy at any given time. For advocates of multifamily housing at the national level, venturing into these debates by introducing ripple effects would usually be counterproductive and only serve to detract from multifamily direct economic impacts—which, as this article has demonstrated, are considerable. 

At the local level, macroeconomic controversies are less pertinent, and the ripple effects are larger in proportion to the direct impacts. A substantial part of NAHB’s local impact model is devoted to estimating economic ripples.  Those interested in more information about the local model can find it on NAHB's Web site. [ return to top ]