Special Studies April 1, 2020
By Paul Emrath, Ph.D.
NAHB Economics and Housing Policy Group
Report available to the public as a courtesy of HousingEconomics.com
This article updates NAHB’s estimates of the economic impact that residential construction has on the U.S. economy. These national estimates are designed for use when the impacts on all U.S. suppliers of goods and services to the construction industry—for example, manufacturers of building products—are of interest. The national estimates should not be used to try to analyze economic impacts confined to the state or local area where the housing is built. NAHB maintains separate estimates and models for that (see the Local Economic Impact web page).
The latest national estimates include the following:
- Building an average single-family home: 2.90 jobs, $129,647 in taxes
- Building an average rental apartment: 1.25 jobs, $55,909 in taxes
- $100,000 spent on remodeling: 0.75 jobs, $29,797 in taxes
The jobs are reported in full-time equivalents (i.e., enough work to keep one worker employed for a full year based on average hours worked per week in the relevant industry). The term taxes is used for revenue paid to all levels of government—federal, state, county, municipal, school district, etc. The tax estimates include various fees and charges, such as residential permit and impact fees.
The impact of a new housing unit depends on, among other things, the value of construction per unit. The first two sets of estimates are based on projections of the value of construction of average single-family homes and rental apartments that will be built in 2020. Details are provided in the following sections, which also describe the methodology used to generate the estimates, including data sources, and break down jobs by industry and government revenue by category of tax or fee.
Employment Impacts by Industry
Probably the most obvious impacts of new construction are the jobs generated for construction workers. But, at the national level, the impact is broad-based, as jobs are generated in the industries that produce lumber, concrete, lighting fixtures, heating equipment, and other products that go into a home or remodeling project. Other jobs are generated in the process of transporting, storing and selling these products. Still others are generated for professionals such as architects, engineers, real estate agents, lawyers, and accountants who provide services to home builders, home buyers, and remodelers.
Conceptually, estimating the effects in each industry is a fairly straightforward exercise in manipulating national accounts maintained by the U.S. Bureau of Economic Analysis, as the flow diagram below indicates:
In practice, the process is slightly more involved than the diagram shows, primarily because the industry categories BEA uses in the input-output accounts and employment by industry tables do not match perfectly.
A key part of the process is inputting the dollar value of construction. Because the estimates reported here are for calendar year 2020, the inputs are projections of the average construction values for new single-family homes and rental apartments that will be built during 2020. The projections include an average construction value of $421,000 for single-family homes and $169,000 for rental apartments. Details and data sources for these projections are given in the appendix. For purposes of presentation, a construction value of $100,000 was chosen for remodeling—a convenient round number on the same order of magnitude as the value of a new housing unit.
The jobs, wages and salaries, and profits generated by these construction values are summarized in Table 1:
The estimates are based on total requirements tables from the BEA input-output accounts, so they capture not only products and services of industries directly used in construction, but the indirect effect of products and services used by those industries as well. For convenience, the table shows detail for relatively broad industry categories.
At this level of detail, the largest share of wages and salaries are generated in the construction industry, followed by manufacturing, trade & transportation & warehousing, and professional & management & administrative services.
At a more granular level, within manufacturing, substantial shares of the wages are generated in many categories of wood products (led by wood kitchen cabinet and countertop manufacturing). Outside of wood products, the largest shares of the manufacturing jobs are generated in the production of concrete, and ornamental & architectural metal products.
Within trade & transportation & warehousing, the largest shares of wages are generated in retail trade, wholesale trade, and truck transportation. Within professional & management & administrative services, the largest share is in architectural and engineering services.
Note that, in the construction industry, profits of proprietors are roughly 40 percent as large as wages and salaries. Subcontractors account for a large share of the proprietors. As discussed in a previous Special Study, two-thirds of single-family builders subcontract out more than 75 percent of their construction work. Often these subcontractors are quite small, even one-person operations. According to the Census Bureau’s most recent (2017) nonemployer statistics, there are roughly 2.5 million business establishments without a payroll in the U.S. construction industry, with an average annual revenue of under $63,000. These numerous but relatively small businesses are excluded from the jobs reported in Table 1, because the government doesn’t classify the self-employed as having jobs, even though most casual observers would probably think of them that way.
On a percentage basis, self-employment is even more of an issue in the real estate industry, where proprietor profits are several times larger than the wages and salaries generated. This is because realtor offices are conventionally organized as a group of independent contractors, who again don’t meet the government criteria for having jobs and earning wages.
Impacts on Taxes
The wages and salaries of workers shown in Table 1 are subject to federal, state, and sometimes local taxes. So are the profits of businesses, whether organized as proprietorships of corporations. Beyond this, many states collect sales taxes on material sold to home builders, and local jurisdictions typically charge fees for approving building permits and extending utility services.
The amount of tax and other revenue generated for governments by new residential construction is shown in Table 2.
At the federal level, income taxes include those paid by corporations, receivers of dividends from corporations, proprietors, and employees. Corporate income taxes paid and dividends are available by industry from the same series of BEA income and employment by industry tables shown in the above flow chart. Otherwise, federal income tax rates of 15.00% are applied to dividends, and 24.46% to proprietor’s income (which incorporates a downward adjustment because the self-employed component of social security taxes is deductible). Variable income tax rates are applied to wages and salaries, depending on the industry in which they’re earned, that averages to 8.906%.
Government social insurance paid by employers (which includes social security, Medicare, and unemployment insurance) is also available directly from the income and employment by industry tables. Rates of 7.65% and 15.30% are applied to wages and salaries and proprietors’ profits, respectively. Derivation of these rates is shown in the appendix.
The benchmark input-output tables also generate a category called taxes on production and imports (or TOPI) by industry. Most of this is sales and other taxes collected by state governments, but BEA’s government current receipts and expenditures tables show that 11.2% of TOPI is collected by the federal government—all either some form of excise tax or customs duty. Although, relatively small, this is included in Table 2 for completeness.
State and local income tax revenue is estimated as 28.2% of the federal amount in table 2, based on the same BEA government receipt tables. These tables are also used to separate state and local sales tax receipts from other forms of TOPI, primarily various types of licenses and non-residential property taxes (although TOPI includes all property taxes and estimate for the residential component was subtracted). Residential property taxes are not included in Table 2, because Table 2 shows one-time revenue impacts realized roughly in the same year construction takes place. There is also and local variation surrounding the difference between non-residential and residential property tax rates, and when a residential rate on the full value of construction kicks in. According to the Census Bureau’s 2018 American Community Survey data, the average effective property tax rate on owner-occupied homes is 1.1 percent of the property’s value.
Finally, permit, hook-up and impact fees are estimated as 3.54% of a for-sale single-family house price from NAHB estimates described in the previous Special Study on Government Regulation in the Price of a New Home. The same percentage is used to estimate local construction-related fees for rental apartments. The remodeling estimates assume an average permit fee equal to 1.25% of the cost of the remodeling project is used, based on conversations between NAHB Economics and Housing Policy staff and NAHB Remodelers.
New and Old Estimates Compared
This study updates the National Impact of Home Building estimates last published by NAHB in 2014. For new construction, the number of jobs generated by an average housing unit in 2020 was fairly close to the estimate published in 2014, although it was slightly higher for multifamily rental and slightly lower for single-family. Almost all of the relatively small decline in jobs per average new single-family home is the result of a changing assumption about the share of homes that are custom built one at a time on the owner’s land. Custom homes tend to be somewhat larger and more expensive, so it requires somewhat more labor to build one. NAHB’s 2014 national impact estimates assumed one-fourth of new single-family homes were custom built, which was appropriate based on data available at that time. However, as described in one of NAHB's blogs, the custom home share has been falling and is currently one-fifth of single-family starts, which is the assumption used to generate the 2020 single-family impact estimates. The nominal impacts—wages, profits & taxes—are all higher in 2020 than in 2014, which is hardly surprising given the intervening six years of general inflation and house price appreciation.
For remodeling, the nominal impacts per $100,000 of spending are roughly the same in 2020 as they were in 2014, but the number of jobs reported in the table is lower in 2020. This simply a result of inflation, as $100,000 doesn’t buy quite as much of anything—including labor—as it did six years ago.
For more information about this item, please contact Paul Emrath at 800-368-5242 x8449 or via email at firstname.lastname@example.org.