Concentration of larger builders means less new or affordable housing

The supply of new housing in the United States has declined over the last decade, despite years of strong economic growth and rising housing prices. As of 2022, notes Johns Hopkins Carey Business School Assistant Professor Luis Quintero, the number of new housing units is 60 percent lower than its monthly peak in 2006—representing the production of $106 billion less in housing per year in the United States.

This is important, he points out, because housing shortages create more obstacles to affordability that strain the budgets of lower-income households and prevent them from building financial equity. Shortages also limit workers’ ability to move to areas of promising employment. There are important implications for the broader economy as well since housing consumption accounts for 16 percent of total personal consumption and 11 percent of the GDP, Quintero notes.

While the research to date has focused on two main causes for the decline in new housing stock—regulatory barriers like restrictive zoning and the scarcity of buildable land (think: land-locked Manhattan)—Quintero has identified and documented an additional channel: the rising market concentration in homebuilding.

“Increasingly over the past decade, we’re seeing that housing production is highly concentrated within local markets,” he says.

Larger builders, fewer homes

In his latest paper, “Fewer Players, Fewer Homes: Concentration and the New Dynamics of Housing Supply,” Quintero highlights some notable statistics to illustrate the growth in the concentration of large builders.

In Annapolis, Maryland, for example, the Craftmark Group was responsible for 3 percent of new units between 2005 and 2007 but 43 percent of new units between 2014 and 2016. In Centreville, Virginia, Technical Olympic built 47 percent of all new housing units between 2005 and 2016. By 2016, Quintero notes, two or fewer firms produced 90 percent of new housing in the most concentrated quartile across all American housing markets.

The downside of such concentration for homebuyers? “It’s not always in the best interest of large, oligopolistic builders to construct more units,” says Quintero.

When many different firms are competing to build, he explains, they tend to build early “to preempt their competitors.” Conversely, in a more concentrated market, builders can time their housing production to maximize their profits without fear of being pre-empted.

“This lowers production volumes and increases price volatility as firms with market power can opt to build when demand growth is strongest and charge prices higher above their nominal cost of production,” he notes in his paper.

To conduct his study, Quintero tapped into a novel data set on residential construction—covering housing regions across the East Coast and in Georgia—and ran the data through IV regression analysis. This dataset is unique, he explains, because it goes beyond housing sold in the market and looks also into production pipelines.

“Through this analysis, we were able to measure the causal effect of the rising concentration of builders,” he says, “showing that it has led to lower production volume, fewer units in the production pipeline, and greater unit price volatility.”

Welcoming smaller builders

Quintero believes his findings hold important implications for local policymakers in the United States who are committed to addressing housing shortages and increasing affordable housing.

“Regional governments have used a wide range of strategies to increase supply or lower the cost of housing,” he notes in his paper, “but to date, these policies do not appear to take into account the role of competition between builders in providing new housing.”

Moving forward, he says, local governments should take steps to make it easier for smaller builders to enter the housing market “because their presence imposes a competitive force that makes it more difficult for larger builders to withhold housing units and increase prices.” One way to do that would be through changes in the way building permits are allocated, he says.

Quintero, who teaches courses at the Carey Business School on the infrastructure development of sustainable cities and works on policy analysis for the 21st Century Cities Initiative at Johns Hopkins University, says that addressing the shortage of new housing stock will be crucial to ensuring the future health of U.S. cities and their surrounding suburbs.

“Lower income families, and particularly those who are newer to the United States or who come from racially disadvantaged communities, are those who have the most to gain from policies that lead to greater availability of affordable new housing,” he says.