NAHB recognizes that to make the best business decisions, you need a clear sense of where the industry stands and what the future may look like.
To help paint the picture, NAHB’s economics team analyzes data from our member surveys, government reports, and other sources and puts it into greater context. Our analysis of the Census Bureau’s newly instituted Annual Survey of Entrepreneurs (ASE) provides invaluable insight into the business operations and finances of construction firms.
Note that the Census survey did not separate residential construction from the rest of the construction sector.
One key ASE finding is that construction firms require relatively low startup funding. The data show that the median amount is about $34,000 in construction—less than the median of $77,000 for all entrepreneurs. More than 20% of construction firms said they raised $5,000 or less to begin operations.
NAHB data corroborate the ASE results. In a 2016 survey, only 23% of home builders reported that lack of access to capital was a major factor preventing young people from entering the market and becoming builders. This is good news, and an important message to relay as we recruit young people to residential construction.
However, there are other barriers to entry. In the same 2016 NAHB survey, almost half of respondents said that a shortage of land was a major factor stopping individuals from joining the industry, even if they have access to capital. And home builders know all too well that a high level of skill and knowledge are prerequisites for running a successful construction company.
Meanwhile, ASE data on profitability show construction on an equal footing with other industries, with about 80% of builders breaking even or turning a profit.
While the Census data does not include a profit rate, NAHB’s 2016 The Cost of Doing Business study found that the average, pre-tax net profit for single-family home builders was 6.4% in 2014—up from 0.5% in 2010 and 4.9% in 2012. The increase in the profit rate is consistent with other housing indicators that show our industry continues to recover from the Great Recession at a gradual, consistent pace.
The Census data also examined items that negatively affect company profits. Builders joined other entrepreneurs in saying that an unpredictable business environment and slow business conditions were two major reasons for lower profit margins. To help overcome these challenges, we can apply the lessons we learned from the Great Recession, such as diversifying our portfolios and catering to different customer bases.
Perhaps the most significant ASE finding is that labor shortages hurt the profits of construction firms more than other companies. This is consistent with NAHB surveys showing the detrimental effects of workforce shortages, and reinforces the need to prioritize recruitment and workforce training initiatives. We also must recognize that worker wages may rise, and we need to manage increasing supply-side costs to keep housing affordable.
I encourage you to view the full analysis from NAHB, which is available online at nahb.org/builderoperations. These findings can help you make informed decisions for your company to succeed and for the overall industry to continue to strengthen.
