In-Depth Analysis, November 10, 2005
by Paul Emrath Ph.D.
The NAHB Model
New residential construction often faces opposition from local groups who are only too anxious to point out real or imagined negative impacts (strain on local budgets to provide additional school services, change in the character of certain neighborhoods, etc.) But new homes have a real, positive effect on local economies—creating income and jobs for local residents, and increased revenue for local governments. A decade ago, NAHB developed its local impact model to estimate these local economic benefits.
The local impact model is comprehensive, in that it captures the effect of the construction activity itself (Phase I), the ripple impact that occurs when income earned from construction activity is spent and recycles in the local economy (Phase II), and the ongoing impact that results from new homes becoming occupied by residents who pay taxes and buy locally produced goods and services (Phase III). To fully understand the impact home building has on a community, it’s important to consider the ripple effects and ongoing benefits.
For estimates that incorporate ripple and ongoing impacts to make sense, they must be based on a local area large enough to include the places where construction workers and suppliers live, the places where the new home occupants work, and the places where both shop for local goods and services. In practice, the appropriate area will usually be a metropolitan area (defined by the U.S. Office of Management and Budget based on commuting patterns), a non-metropolitan county, or an entire state. The construction activity analyzed may be confined to a smaller area—even an individual project—but the impact will then be spread over a larger local area. Since the local impact model was initially developed, it has been successfully applied to over 325 metropolitan areas, non-metropolitan counties, and states across the country (the darker shaded areas in Figure 1).
The Revised Estimates
To illustrate the benefits of home building in a typical case, NAHB has applied the model to a hypothetical metropolitan area with key inputs (value of the units and raw land, construction-related fees, and property taxes) set equal to national averages. These results are readily available and can be used on short notice to demonstrate the benefits of home building to communities in general.
Since the local economic impact model was first developed, a number of updates and improvements have been made. The main purpose of this article is to present new “average city” impact estimates. The last time such estimates were published was in 2002. Not only have the key inputs been updated, but the model itself has been recalibrated with newer data. The most important data sets used in NAHB’s local impact model are the National Income and Product Accounts (U.S. Bureau of Economic Analysis), the Consumer Expenditure Survey (U.S. Bureau of Labor Statistics) and the Census of Governments (U.S. Census Bureau). These are the same sources used to generate many of the official economic estimates that are often quoted, such as the rate of economic growth and the overall rate of inflation.
The NAHB model produces separate impact estimates for single family and multifamily construction. The estimated local one-year economic benefits of building 100 single family homes in a typical U.S. metropolitan area (shown in Figure 2) include $16.0 million in local income, $1.8 million in taxes and other revenue for local governments, and 284 local jobs. These impacts represent income and jobs for residents of the typical metropolitan area, and taxes (and other sources of revenue, including permit and hook-up fees) for all local jurisdictions within the area. They include both the direct impact of the construction activity (Phase I), and the impact of local residents who earn money from the construction activity spending part of it within the metro area (Phase II).
The additional, recurring impacts (Phase III) of building the 100 single family homes include $3.2 million in local income, $648,000 in taxes and other revenue for local governments, and 63 local jobs. These are ongoing, annual local impacts that result from the new homes being occupied, and the occupants paying taxes and otherwise participating in the local economy year after year. The impacts are summarized in Figure 2.
The key assumptions underlying the single family estimates are an average price of $284,887 per housing unit; an average raw land value of $45,012; an average of $7,008 in impact, hook-up, permit, and other fees per unit paid to local governments; and an average annual property tax payment of $3,211.
Similarly, the estimated local one-year impacts (Phases I and II) of building 100 multifamily units in a typical U.S. metropolitan area include $7.0 million in local income, $710,000 in taxes and other revenue for local governments, and 133 local jobs. The additional, recurring impacts (Phase III) of building the 100 multifamily units include $3.2 million in local income, $461,000 in taxes and other revenue for local governments, and 52 local jobs (Figure 3).
The key assumptions underlying the multifamily estimates are an average market value of $112,277 per housing unit; an average raw land value of $17,740; an average of $2,762 in impact, permit, and other fees per unit paid to local
On average, single family homes generate larger economic benefits than multifamily units do. In Phases I and II of the model, this is due almost entirely to the higher value of single family homes, so that they generate a greater demand for construction labor and other inputs.
Although the ongoing benefits in Phase III of the model are also larger for single family, the difference is less than in Phases I and II. Except for property taxes, the ongoing benefits are driven by the income and spending tendencies of the families who move into the new units. Multifamily residents tend to have lower incomes, but this is partially offset by their tendency to spend a larger share of the income on locally produced goods and services. It is further offset by the tendency of multifamily residents to be renters, so that part of their incomes goes to pay for locally provided property management services. The equivalent expense for single family home owners is the mortgage payment. After the evolution of mortgage markets over the past decade, however, neither the servicer nor the holder of the loan is likely to be local in the typical case. The NAHB model therefore counts no fraction of mortgage payments as a local economic benefit.
When to Use Which Numbers
The August 2005 In-Depth Article "Home Building's Direct Impact on the U.S. Economy" presented estimates of the national impacts of home building. The format of the estimates was similar, in that it showed categories of income, jobs, and taxes generated by single family and multifamily construction. Any other similarity to estimates reported here for the local impacts is a coincidence, however. There are many important differences between the two sets of estimates. The most important ones are listed below.
National estimates: Do not include the equivalent of Phase II (ripple of effect of construction workers spending the money), or Phase III (ongoing effect that occurs when the units are occupied). But do include impacts in all U.S. industries.
Local estimates: Include both Phase II and Phase III. But only include impacts in 95 of the roughly 600 U.S. industries tracked in the most detailed accounting system employed the Bureau of Economic Analysis (virtually the entire manufacturing sector, for example, is excluded).
The national model excludes ripple effects, because at the national level these are linked to macroeconomic assumptions about how much slack there is in the U.S. economy. At the national level, there are always disagreements and competing assumptions about this, and bringing this disagreement into a discussion of the benefits of residential construction will most often side track the primary focus of direct impact and could be counterproductive. Substantial ripple effects are built into the local impact model in both Phase II and Phase. At the local level, controversies about slack in the U.S. economy are less relevant, and the ripple effects are larger in proportion to the direct impacts.
The direct impacts tend to be smaller in the local model, because the model excludes a substantial number of U.S. industries. Markets for many products and services are simply not local in nature. A large number of manufactured products, for example, are routinely shipped across the county. So even if someone who moves into a new home in Seattle uses software manufactured in Seattle, this does not necessarily cause more of the software to be manufactured. That resident could easily end up using the same software, produced by the same company, if he or she instead lived in Portland. The exclusion of many industries because they are not local in nature is a conservative feature of NAHB’s local impact model that avoids overstating the economic benefits and makes it easier to defend the model when it’s challenged.
As noted, the national impact estimates exclude an ongoing, occupancy effect, primarily because it would imply that not building a housing unit will cause people not to form a new household or to move out of the country. This will often not seem like a reasonable assumption. In Phase III of the local impact model, on the other hand, there is a strong ongoing effect, based on the assumption that building a housing unit in a particular market area causes a household to live in that market area rather than a different one. For instance, children of current residents may move into the same area when they form new households, rather than moving further away due to a lack of available housing units that are both suitable and affordable. One way to summarize NAHB’s local impact model is to say that it analyzes the impact of locating new homes in one market area rather than another.
Although the presence of two sets of impact estimates—national as well as local—may seem confusing at times, a little thought should persuade advocates of housing that both are really necessary. National impacts are needed when discussing federal programs that subsidize or provide financing for affordable housing with, for instance, members of Congress. Local impacts are needed when trying to get a particular project approved or defeat anti-growth ordinances.
The estimates in this article show the local income, taxes, and jobs generated by building 100 single family and 100 multifamily units when the key inputs are based on national averages. When more specific results are needed—to get a project approved, counter anti-growth measures, or generally publicize the economic benefits of home building—given the necessary inputs and a little lead time, a local impact report can be produced for a particular local area. NAHB currently provides this service for a modest fee. Versions of the model have been developed to handle the special cases of age-restricted single family projects intended for active adults, and multifamily projects financed with Low-Income Housing Tax Credits.
For more information, see "The Local Economic Impact of Home Building".
See previous articles
 The average market values are based on the construction value per unit numbers reported by the Census Bureau’s Manufacturing and Construction Division. Raw land is based on a standard percentage of market value used by the Census Bureau. Average construction-related fees are based on the construction cost breakdowns from Professional Builder’s “Giants” (400 large home building firms) published in April of 2004. In most important respects, these numbers are consistent with cost breakdowns produced previously by the NAHB Economics Group. Property taxes are based on average effective rates for the U.S., generated from decennial Census data. See article "Effective Property Tax Rates"
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