Decline in Multifamily Construction Means Fewer U.S. Jobs
Between 2002 and 2005, the number of housing starts per year in buildings with five or more units were consistently higher than 300,000 (see chart in the feature on starts), but have declined modestly since then, and are projected to decline even further. NAHB currently is forecasting that total five-plus starts will come in at 288,000 in 2008 and drop to 218,000 in 2009. This naturally raises questions about the impacts a decline in multifamily construction has on the U.S. economy.
The employment impacts are broad-based. In addition to the workers employed directly to build the structures, multifamily construction generates jobs in the industries that produce and distribute steel, concrete, lumber, lighting fixtures, heating equipment, and other products. Additional jobs are generated for professionals such as architects, lawyers, engineers, lenders, real estate agents and others who provide services used by multifamily builders.
But a decline in the number of multifamily units built doesn’t tell the whole story, as the composition of multifamily starts has changed significantly over time. For example, starts of rental multifamily (including 2-4 units) actually increased by 9,000 units in 2007 while multifamily condominium starts plummeted from 151,000 to 115,000. This is significant, because the value of a typical condominium unit is greater than the value of a typical rental apartment, and the difference has been expanding.
According to the Survey of Market Absorption (SOMA),1 the median asking price for new condos (in buildings with five or more units) was only around $200,000 at the start of 2004. By 2006 this had increased to more than $300,000, where it has remained. In contrast, the median asking rent for new five-plus condos increased much more slowly over the same period—from about $910 per month at the start of 2004 to $1,170 according to the latest measurement.
Because of the obvious differences between condos and rental apartments, it makes sense to report separate impacts for the two categories of multifamily construction.
Across all industries in 2008, NAHB estimates that building 100 average multifamily housing units generates a total of
- 116 jobs for 100 rental apartments
- 293 jobs for 100 multifamily condominiums
The difference reflects primarily the distinction between condos and rental apartments in average construction value. 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 2008, NAHB estimates that building 100 average multifamily units generates a total of
- $3.3 million in tax and other government revenue for 100 rental apartments
- $8.6 million for 100 multifamily condominiums
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.
For these and other reasons, NAHB does not recommend attempting to adjust national impact numbers in an attempt to draw conclusions about state or local economies. NAHB has separate models to estimate the impacts of home building at the state or local level, and the information is readily accessible on the “Local Economic Impact of Home Building” section of NAHB’s web site.
Jobs and Income by Industry
The wage, profit, and employment impacts of building 100 average rental apartments and condominiums 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, 100 rental apartments generate 111 of these full-time equivalent jobs, and 100 condos generate 293. Just under half of these full-time jobs (54 and 140, respectively) are construction jobs.
In the construction industry, however, there are many small businesses with no payroll, often specialty trade contractors. In fact, the 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, a share of the firms earning proprietors’ income and corporate profits (which include profits of S-corporations) generated by multifamily construction will consist of small, individual entrepreneurs. Although such self-employed mom-and-pop operations do not technically count as jobs in the federal accounting system, many people would probably think of them that way.
The estimate of 116 full-time jobs is based on 100 new rental apartments with a market value of about $116,000 per unit. This is based on asking rents reported in the SOMA and the relationship between rents and value for relatively new units in the Census Bureau’s Residential Finance Survey2 Because the rent data are available with a lag, they are brought forward to 2008 using NAHB’s forecast of core inflation (which excludes the traditionally volatile and seasonal energy and food price components).
Rental apartments are conventionally separated into market-rate and subsidized rental (most often financed with Low-Income Housing Tax Credits, sometimes in combination with another program, such as tax-exempt multifamily bonds). There is no reason to think that the average construction values for market-rate and subsidized rental units differ drastically. Indeed, a goal of rental housing programs is to provide market-rate quality units to qualified tenants at below market-rate rents. Therefore, as a first approximation, it’s reasonable to apply the national rental apartment estimates to either market-rate or subsidized apartments.
The estimate of 293 full-time jobs is based on 100 new multifamily condos with market value of about $308,000 per unit, based on asking prices for condos reported in the SOMA brought forward to 2008 using NAHB’s forecast of the OFHEO repeat home sales index.3
The employment impacts are based on construction value. Construction value is not same thing as the market value of a multifamily housing unit, because the market value incorporates the value of raw land. The creation of raw land does not require anyone’s labor (unless God is classified as a laborer), and so should not be counted as a construction activity that generates jobs. However, all of the work involving developing and preparing a lot to build on does require conventional construction labor and therefore is properly counted as part of construction.
For rental apartments, we assume raw land accounts for 10.6% of market value, based on a factor that the Census Bureau applies to new for-sale single family homes. In addition to subtracting the value of raw land, the Census Bureau makes several other adjustments to the price of homes that are built for sale in order to convert it to market value. In particular, it subtracts the estimated value of landscaping, appliances, realtor/brokers fees, and marketing/finance costs. The NAHB national impact model essentially treats condos like for-sale single-family housing—subtracting these items from construction value initially, but adding them back in at an intermediate stage before the final impacts are calculated.
In addition, a share of apartment buildings are sold through brokers, so adding a reasonable estimate for the commissions seems preferable to ignoring them altogether. An estimate of a little over 1% of the value of a multifamily rental unit is added, based on NAHB discussions with brokers who sell multifamily properties.
As mentioned, the employment impacts of multifamily construction are broad-based and span several U.S. industries. In addition to the actual construction jobs, building 100 average rental apartments generates 18 full-time jobs in manufacturing, 17 in wholesale and retail trade, and 12 in professional and business services. Building 100 average multifamily condominiums generates 46 full-time jobs in manufacturing, 42 in wholesale and retail trade, and 33 in professional and business services.
Fees and Taxes
The amount of tax and other revenue generated for government when an average multifamily unit is built is shown in Table 2. Calculating income and Social Security taxes from the wages, salaries, and business profits generated by home 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.4 The average effective rates work out to 8.1% for federal income taxes and 2.1% for state and local income taxes. For businesses, whether proprietorships or corporations, effective rates of 35% (federal) and 6.4% (an average over all states) are used. The effective rate for Social Security taxes, whether paid directly by the employer or employee, is 15.4%. All of these effective tax rates are based on 2006 data, which is the most recent that is currently available.
State and local sales taxes and the various construction-related fees imposed by state and local jurisdictions are estimated as follows: Construction cost breakdowns from Professional Builder Magazine published in April of 2004 are used to estimate that materials account for about 30% of the value of new construction. These numbers are based on a relatively large sample and are consistent with cost breakdowns produced periodically by NAHB’s Economics Group. To the 30% of value, an effective average sales tax rate of 5.27%, derived from aggregate government accounts, is applied. Also applied is the Professional Builder average of a little over 2% of value to account for permit, hook-up, and impact fees.
Of the $3.3 million in tax and fee revenue generated when 100 average rental apartments are built, federal income taxes (nearly $1.1 million, if taxes paid by businesses and employees are combined), and Social Security taxes ($847,000) account for the largest share. However, the amounts of revenue generated in the form of state and local income taxes ($360,000), construction-related fees ($304,000), and sales taxes ($199,000) also are substantial. The $8.6 million in tax and other government revenue generated by 100 new multifamily condominiums breaks down much the same way, but all of the numbers are proportionately larger due to the greater construction value per unit assumed for the condominiums.
Returning to the question posed at the top of this article, what if multifamily production falls by 70,000 units in 2009, as is projected in the current NAHB forecast? The impacts of this are even worse than the raw drop in production suggests. The forecast incorporates a proportionately greater reduction in new condominiums, which on a per unit basis support more jobs and tax revenue. Thus, if multifamily construction dies, in fact, decline as projected in 2009, the U.S. economy stands to lose a total of 155,000 jobs across a wide range on industries, and roughly $4.5 billion in combined tax and other revenue for federal, state, and local governments.
1The SOMA is financed by the Department of Housing and Urban Development (HUD) and conducted by the Census Bureau. HUD recently announced plans to discontinue the SOMA, but this decision was overturned by a letter writing campaign organized by NAHB.
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