The Residential Construction Industry and Its Ties to the Economy

A Necessity in Disguise

         Dating back to the very beginning of time, what came first? Man of course!  As of now, the presence of man is very prominent and nothing seems to be changing that fact.  The question is what made man so prominent?  Humans are capable of learning, evolving, and creating efficiency, but what made man able to survive?  The answer to that question is creation.  One of the first creations that man made was residency.  It started with small huts and lean-to’s, but has now evolved into some of the most beautiful foundations in the world.  Due to this creation, a prominent worldwide industry was generated now known as the residential construction industry.  This industry is so old and advanced that the physical building is now only a mere detail of what the entire division falls into.  The housing production business has fluctuated over time as a result of supply, demand, demographics, the economy, and other causes.  In analysis of the history, evolution, and connections within the housing production business, there is a clear distinction of how important the industry is and what effects it’s progress.

         In order to analyze this industry’s importance, one must understand the background of the business.  As Barbara J. Jackson puts in her textbook Construction Management Jumpstart “The industry’s purpose is to address the housing needs of society, residential buildings are typically privately funded, and custom to the owners and architects.  Every building is different in its own way.  This being a factor of location, weather, style, availability, etc.” (Jackson 2).  The make-up of construction builders in America is quite ironic.  Small builders (local small companies or individuals) account for 80% of the industry, while the other 20% consists of large contractor companies.  However, of the 895,000 homes that were built in 2015 (“Characteristics of New Housing”), only 20% of these homes were built by small contractors, the rest from large contractor companies like Meritage Homes Corporation, Beazer Homes, and The Ryland Group (Wilson).  Even though this production variance seems skewed, the amount of work is equally balanced.

         This industry has seen very prominent demand in the past.  The “boom” of the residential construction industry occurred around the post-WWII period that resulted due to changing land regulations, financial products and availability, as well as a significant increase in population.  

To this day, the regulations and methods that were introduced at the “boom” period such as The Federal Land Policy and Management Act of 1976, allowing freedom of construction among private and public lands (“Federal Land Policy and Management Act of 1976”), are very similar.  The industry began a growth period as a result of the opportunity given from these regulations creating a demand for this type of construction.  At the same time, The National housing finance policy “seeking to promote various types of public-private partnerships for realizing the goal of affordable housing for all”(“National Housing Finance Policy) secured a long-term status for the industry in the national economy, firmly rooting it for years to come.

         As time went on, the industry began progressing in quantity and quality.  Thus creating what is known as “the housing boom of the early two-thousands”.  According to Kathryn J. Byun of the Monthly Labor Review “Demand for housing funding more than doubled from 1991 to 2005, from 264.0 billion real dollars to 586.0 billion real dollars” (Byun 4).  What started this and continued to support it was the cultural interest in physical new and remodeled homes.  

Living in a home began to be a social norm for families creating a need for more improvement in the industry as a whole.  There was much activity in home purchases and remodeling which called for an advancement in homebuilding technology and a need for specialization in certain sectors of building.  The concentration of trades soon evolved among residential production, builders transitioned into specific professions to increase building specialization and to even out the competition.  With this focus, there was an increase in quality housing before the recession (see fig. 1), but more importantly it contributed heavily into [pic 1]

the knowledge base of building codes.          Fig. 1. Census.gov, US Housing Starts, Y Charts, 21 January 2014. 

Within an environment so focused on expanding homeownership, there was a record amount of single and multi-family homes built while increasing homeownership as well.

         Unfortunately for the industry, the eventual recession in America brought this prominent growth to a screeching stop.  In just one year, the number of housing starts went from 1,649,000 to 1,000,000 and continued to diminish (“US Housing Starts Chart”).  This decline started to reduce the financial and organizational resources available to residential firms setting the industry beyond just a temporary setback.

         There is no way to estimate the end result of this transformation in the industry, however it does call for a rethinking of the industrial process that produces American homes.  These new assumptions can be made on recently developed technological innovations like drone surveying, smart highways, and the emphasis on “green” construction.  These “green” processes have and will dramatically alter the construction process, as well as the organization of certain players in the industry.

In addition, one of the least determining but impactful factors of the future is the ever changing national household composition.  Socially and economically, there are conditions arising to reduce the homeownership of single family housing (low individual population housing) and evolve to produce for the higher demand of multi-family housing (larger quantities of people in housing area).  Compared to the past housing spurs where single family housing was in high demand, multifamily housing is now becoming that necessity (see fig. 2).  Demography is very [pic 2]

difficult to predict, given that

Fig. 2. Tyler Durden, Housing Starts: Single and Multi-Family Units, Census.gov, 17 August 2015

the future is ever changing, but the style of housing provided will largely effect the industry in what types of housing will accommodate the future.

         This increase in multi-family housing is not only a result of demographics, but a cause of the great demand of rental units and rental construction.  A major part of the real estate industry is based out of rental homes.  Today, especially in certain areas, it is more common to rent homes as a result of the low economy.  Audrey Chang from The Joint Center for Housing Studies of Harvard University states that “80% of single family units are owned by landlords, property managers, and other legal entities” (Chang).  If this recent trend of rental units continues, there may be an increase in production, however this will most likely bring up the price of housing, possibly causing further issues.