Labor shortages put brakes on homebuilding

Victor Whitman - Scotsman Guide - Sep 9, 2016

A shortage of construction labor is frequently cited as a major reason why single-family construction starts have lagged well behind the historic average. Robert Dietz, chief economist for the National Association of Home Builders (NAHB), spoke with Scotsman Guide News about the extent of the problem and what needs to happen to attract more workers into the construction industry.  

Would you say there is a labor shortage in the home-construction industry?

The most recent data that we have from the government that measures open, unfilled construction-sector jobs, that’s both residential and nonresidential, is for the month of July. In that month, there were 214,000 unfilled construction-sector jobs. That is very close to the highest number we have seen since the recession. When you do a 12-month moving average to smooth out the seasonality in the data, what you see is a rising trend in the open-job rate basically since 2010. Currently, we are at an open rate that is comparable to 2006. So, the open rate of unfilled jobs is comparable, at least as a percentage, to the rate that we last saw during the building boom. It is absolutely an issue that builders have to confront across the country, and the results are that you have got delays in projects, and you do have residential construction wages right now rising faster than overall wage growth in the economy.  

Are people just not going into construction careers or are companies leaving positions unfilled?

I think the problem is twofold. One is related to the business cycle from the Great Recession itself. The residential construction sector lost a million and a half payroll employment positions during the recession. Since the low point of employment, we’ve gained about 611,000 positions. So, out of the million and half positions we lost, we’ve only added 600,000. Then you have a medium-term challenge of who is the next generation of construction workers going to be. Nationwide, the median age of somebody in construction is a little older than age 40, so you do have an aging workforce. The combination of those factors — a large number of job losses, of people who essentially left the industry and moved into different careers during the recession, and the aging workforce — has meant that it has been more difficult for builders and subcontractors, and everyone else in the construction sector, to get those workers at the right time and the right price.

What is it going to take to bring the workforce back?

This is one of those problems that is going to take years to work out through a combination of the industry and markets adjusting, as well as recruitment by groups like the Home Builders Institute, which is a sister organization of NAHB that works on workforce development. We have got a low unemployment rate. If we could get a little bit of growth in the labor-participation rate and, in other words, expand the labor force, that would certainly help. Like I said, we are seeing some wage gains faster than the economy as a whole. That should help attract some workers. Then, it is going to be kind of an outreach effort: local homebuilder associations, local builders and community-development organizations working with community colleges and local high schools to make the argument that a profession in the trades is a good way to build a career. That is going to take some time.

What is the practical outcome of this shortage on job sites and on the single-family construction numbers?

A shortage of construction workers acts as a limiting force on how fast the industry can expand. Residential construction is growing. We expect that single-family construction will be up about 10 percent [in 2016]  to a little under 800,000 single-family starts. We expect that to grow by 11 percent next year, but it could be growing faster. We’ve got low existing home inventory. That is something that you see consistently cited in the National Association of Realtors pending and existing home-sales reports. There is a demand-side incentive to get more building, but lack of labor, and I would add two other things [that are hindering construction activity]. I collectively call these the three Ls: lack of labor, lack of lots — we’ve got 64 percent of builders saying that lot supplies in their market are low or very low. Then the third L is lending. Typically, in housing, when we think lending, we think mortgages, but in this case on the supply side, we are talking about what is called acquisition, development and construction loans, AD&C loans. That is the business capital necessary to finance construction before you sell or lease a residence. Those three things, the limits on them, govern how fast the homebuilding industry can grow in a given year.

Are you confident that construction employment will rebound?

I do think we will see the workforce expand, but I don’t think it will expand as fast as builders would like it to. There is a lot of work to be done. That can be accomplished by trade associations. It can be accomplished by businesses and local groups trying to attract additional construction workers. What we have seen in the short run is a bit of slowing in hiring. Net job gains in residential construction have been averaging more than 10,000 additional workers a month. In recent months, that has slowed to about 3,000 gains a month. It is having an impact on how fast the industry is expanding. The fundamental driver of construction is on the demand side. The supply side is determining how fast that demand is met. So, yes, I am positive that single-family growth, even if we end the year in 2016 slightly below 800,000 single-family starts, we do believe we are headed back over the next few years to just about 1.3 million single-family starts a year. That is what you would expect, given the population growth and the need to replace older housing. To accomplish that, we have got to add more workers.