TREND POSES RISK TO OVERALL U.S. ECONOMY, ACCORDING TO COSMAN-QUINTERO STUDY
The growing domination of local homebuilding markets by relatively few firms has slowed the housing industry, posing a risk to the overall American economy, two researchers at Johns Hopkins University demonstrate in a new study.
Concentration in residential construction markets has led to greater volatility in the prices of homes, less production, and fewer vacant unsold units. As a result, the annual value of new housing production has decreased by $106 billion, according to the paper by assistant professors Jacob Cosman and Luis Quintero of the Johns Hopkins Carey Business School.
This matters to the consumer-driven U.S. economy because it limits the choices for potential homebuyers. As the authors note, housing consumption is a major part of the economy. In 2016, it accounted for 11 percent of gross domestic product and 16 percent of total personal consumption expenditures. A damper on homebuyer options implies a threat to the nation’s general economic health.
“A key component of the overall business cycle in the United States is the housing market cycle,” says Cosman. “As we saw in the Great Recession, shocks to the general economy are often transmitted via shocks in the housing industry.”
Quintero adds, “Housing market cycles tend to be driven by fluctuations in the volume of production rather than fluctuations in housing prices. That’s why examining the production of new housing provides insight into the dynamics of the overall economy.”
Housing production has become highly concentrated in many local markets, Cosman and Quintero show in their analysis. For example, in a recent 10-year period, one firm built 37 percent of all new housing units in Bayonne, New Jersey. During the same time, another firm constructed 47 percent of the new homes in Centreville, Virginia.
The degree of the concentration also has been increasing. A company in Annapolis, Maryland, is fairly typical of this trend: It built 3 percent of new local units in 2005-2007 but 43 percent of them in 2014-2016.
What’s more, the share of local home production by the largest firms in the study has increased, and the number of firms producing 90 percent of all new units has decreased. By 2016, in the most concentrated one-third of all sampled housing markets, two or fewer firms produced at least 90 percent of all new homes, the authors find.
Three factors have contributed to this denser concentration, according to the study:
- Many building firms filed for bankruptcy after the 2008 financial crisis, thinning the field in favor of larger and more financially stable companies.
- A post-crisis federal stimulus measure enabled homebuilders to write off then-recent losses on their tax returns. Consequently, the 13 largest homebuilders reaped a total of $2.4 billion in tax refunds for 2009 ― an average of nearly $200 million per company.
- Large national homebuilders have been merging in recent years. A recent $9.3 billion deal shows just how sharply consolidation has increased: Lennar, after acquiring WCI Communities last year for $643 million, merged with CalAtlantic in early 2018 to form the largest homebuilding firm in the country.
Giant firms facing little competition enjoy a variety of benefits, the authors observe. These include the ability to handle design and development in-house, the potential for joint ventures with government and industry, brand-name recognition, and bulk purchases that lower the cost of materials.
As a Wall Street Journal headline cited in the study put it: “Fewer Home Builders Means Happier Home Builders.”
And they’ll probably stay happy, Cosman says, adding: “Given the various advantages of the biggest firms, it’s safe to predict that the current consolidation will persist and that many local markets will continue to be highly concentrated.”
For their analysis, the authors examined urban and suburban markets in and/or near Allentown and Philadelphia in Pennsylvania; Atlantic City, Trenton, and Vineland in New Jersey; Baltimore and Salisbury in Maryland; Dover, Delaware; Washington, D.C.; and New York City.
Using their data to construct a theoretical model, the authors also considered a “counterfactual scenario” in which competition in the industry remained at its higher 2006 level. Their conclusion would probably be more pleasing to consumers than to the big homebuilding firms: More competition among builders is associated with larger supplies of housing and substantially lower price volatility.
Cosman and Quintero have presented their study in invited talks at the Federal Reserve Board and the American Real Estate and Urban Economics Association national conference. They suggest in the conclusion of their paper that future research could dig even more deeply into how housing cycles affect the overall economy.