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.”