Smaller 'Mom and Pop' Home Builders Key Driver of U.S. Residential Construction Industry, Says NAHB Report

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According to a new study by economists at the National Association of Home Builders (NAHB), small home builders are the mainstay of the nation's housing industry, including a sizable number of self-employed mom-and-pop operations.

"Small businesses have always been the predominant force in housing and they lend this industry its economic vitality," said Bob Jones, NAHB chairman and a builder from Bloomfield Hills, Mich.

"We are seeing market conditions returning to normal in many parts of the country after a long, hard downturn, and these companies have the agility to move quickly and start leading the economy forward," Jones said. "But first they need access to financing to build, which remains scarce during this critical phase of the recovery."

The study notes that the small builders and tradesmen who produce the majority of the nation's new homes "compete in a fierce marketplace that challenges their economic survival. A much higher share of small businesses both enter and fail in the residential construction industry when compared to all U.S. firms," according to the report.

"The residential construction industry is very dynamic, and a large number of firms enter the industry each year and a large number exit each year," the report says. "With few barriers of entry, start-up builders can launch their business with a single new home." Most home builders and remodelers are small businesses, "further facilitating movement into the industry when opportunities improve, and exiting either because of business failure or life-cycle decisions."

The report concludes that housing remains the domain of small businesses and looks at the Census Bureau's Economic Census, which provides information on the size of businesses in various industries. Conducted every five years, the most recent census is based on business activity that occurred in 2007.

Among the data that provides a profile of the housing industry as of 2007:

• Slightly more than 65 percent of all home building establishments had annual receipts below $1 million. Almost 31 percent generated between $1 million and $10 million; and 4.1 percent had more than $10 million.

• In 2007, 41,483 new single-family general contractors (who build on the owner's land) did less than $1 million in business, about a 70 percent share of the 59,679 businesses in this group. Although multifamily general contractors tend to be somewhat larger, 42 percent of them also recorded less than $1 million in yearly sales or receipts. About 60 percent of the 35,378 "operative builders" (who own the land upon which they build) did less than $1 million in business. Eighty-four percent of 73,888 residential remodelers and 61 percent of 6,462 land developers saw less than $1 million.

• Some 25 percent of $89.3 billion in total construction value delivered by single-family general contractors in 2007 was subcontracted out. Subcontracting amounted to half of $34.6 billion worth of construction among multifamily general contractors, 22 percent of $180.1 billion for operative builders and 23 percent of the $52.1 billion for residential remodelers.

• These results are consistent with findings from NAHB's monthly Builder Economic Council survey. Among the single-family builders responding, 40 percent said they subcontracted 100 percent of their work and another 39 percent subcontracted 76 percent to 99 percent of the work. The same builders used 24 specialty trade contractors in the process of building the average single-family home.

• Seventy-four percent of a total of 477,950 specialty trade contractors rang up less than $1 million in business in 2007.

• Under U.S. Small Business Administration standards, at least 96 percent of residential builders and remodelers were small (defined as doing no more than $33.5 million in annual business). Also considered small were 94 percent of land developer (less than $7.0 million) and 98 percent of specialty trade contractor (less than $14 million) establishments. Most of the home building and trade contractor establishments were far below the SBA ceilings.

Looking beyond the Economic Census, which only counts establishments with employees on the payroll, NAHB estimates that the ratio of the income of usually small, self-employed independent contractors to wages and salaries generated in the construction industry is one to four. This is compared to a ratio of one to 10 in some other industries, such as manufacturing.

Housing is also providing more opportunities for Hispanic businesses than U.S. industries overall, the study found.

The 2007 Survey of Business Owners (SBO) recently reported that in 8.3 percent of a total 27 million businesses -- or 2.3 million -- at least 51 percent of the stock or equity was Hispanic-owned. The Hispanic share for the construction industry (both residential and nonresidential) was higher -- at 10.0 percent, or 340,766 out of 3.4 million construction firms.

Of the 2.6 million construction non-employers found in the SBO survey, 11.6 percent were Hispanic-owned, as were 12.2 percent of the 1.9 million non-employer specialty trade contractors. For several trades, the Hispanic share among non-employers was around 20 percent -- including structural steel and precast concrete, drywall and insulation, tile and terrazzo and poured concrete.

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