AF F O RD A B L E
M.E. Rinker, Sr., School of Building Construction College of Design, Construction & Planning PO Box 115703,
University of Florida, Gainesville, FL 32611-5703 TEL: (352) 392-7697 SUNCOM: 622-7697 FAX: (352) 392-4364
Volume XII, Number 4 June 2002
At various times the Shimberg Center for Affordable Housing receives inquiries
about the economic impact of home building in a community. Generally, the issue at
hand is whether the construction of a new home represents an asset or liability. Because
the question continues to arise, we have reprinted the content of the December 1997
newsletter that first addressed the question.
Answering the question, however, is not easy. The National Association of Home
Builders (NAHB) has investigated the issue extensively and published articles describing
their work. They also have developed a model for estimating the economic impact based
on an input-output matrix developed by the Bureau of Economic Analysis of the U. S.
Department of Commerce.
Presented in this newsletter is a discussion of the factors that should be considered
when attempting to forecast the local economic contribution of home building. The
NAHB economic impact model is also discussed briefly. At the end of the newsletter
are references to selected publications that may be of further assistance.
When a home is built it affects the local economy in a variety of ways. Some of these
effects are short-lived, such as the wages paid to the construction workers; and some of
the effects go on year after year, such as real estate tax payments. Another aspect of the
economic impact is whether the effect is either a direct effect, such as the wages or real
estate taxes, or a ripple effect, such as the goods and services purchased by the construc-
tion workers who received the wages.
It is not uncommon for the beginner to
estimate the economic impact on a community
of new home construction by considering only
the short-term benefits. Typically these eco-
nomic benefits include: wages paid to local
craftsmen, purchases made at local building
supply outlets, permit and impact fees paid to
the local government, and transportation and
food expenses paid for by the workers during
construction. Other short-term costs to the
builder, the buyer, or the seller that cause
money to enter the local economy only during
the actual construction period includes ap-
praisal fees, title searches, closing costs, broker
fees, and attorney fees.
In the long term, the real estate taxes paid
year after year are the most obvious long-term
economic benefit to the community. Probably
the second most obvious long-term economic
benefit is the purchases made by the family
occupying the completed home.
Direct economic impacts are those that take
place during the construction period and are
directly related to the development, construc-
tion, and sale of the home. The short-term
impacts already discussed are direct effects.
Another important category, however, are the
ripple effects. Ripple effects refer to the eco-
nomic activity that takes place as a secondary
or tertiary effect of the development, construc-
tion, and sale of the home. Most, but not all,
ripple effects are long-term.
Consider the short-term, direct economic
effect of the wages paid to the workers building
the home. Once paid by the builder, the work-
ers use the income to purchase food, clothing,
shelter, and entertainment for their families.
These purchases are the first economic ripple
and they occur in the short term. The ability of
the workers who are constructing the home to
make purchases as a result of the wages paid by
the builder continues to ripple through the local
economy. That is, when the worker's family
buys food, the employee of the food vendor
earns a wage and that wage is again spent in the
community, and so forth. The continuing
effects of recycling wages in the local economy
produce more jobs, wages, and local taxes. This
recycling is the ripple effect, which some people
call the multiplier effect.
The NAHB states that the area within which
economic impact should be measured is the
metropolitan statistical area (MSA) as defined
by the U. S. Office of Management and Budget.
In a non-metropolitan area the area of impact
may be a county. These geographic areas
encompass the places where the workers live,
where the vendors are located that supply the
building materials, where the homeowners
work, and where the workers and homeowners
shop and go for entertainment.
In a given local area, studies have shown that
there is a close relationship between the number
of new homes and the number of new house-
holds. The relationship is complicated by
changes in vacancy rates and by demolitions;
but, new homes and new households are closely
tied. Also, not every homebuyer moves into a
local area from outside. However, a move into
a new home by a household from elsewhere in
the same locale will ultimately be balanced by a
household moving in from outside the area.
The purpose of the model is to quantify the
impact on the local economy of building a
home within the boundaries of that local
economy. The model is divided into three
phases. Phases I and II focus on the one-time
effects that occur as a result of construction.
The third phase addresses the ongoing annual
effect including tax payments and the result of
the completed unit being occupied.
Phase I Construction looks at jobs,
wages, and local taxes and user charges and
fees generated by the actual development,
construction, and sale of the home. The jobs
include on-site and off-site construction work
as well as retail and wholesale sales of compo-
nents, transportation to the site, and all of the
professional services required to build a home.
The inputs required to build housing are
estimated by multiplying national estimates by
the ratio of a typical new home price in the
area being analyzed to the national average.
The inputs are then translated into wages, jobs,
profits, and taxes using the Bureau of Eco-
nomic Analysis (BEA) input-output tables as
well as BEA's National Income and Product
Phase II is the Ripple Effect. Included are
the wages and profits distributed during the
construction period that are spent by local
workers and business owners on locally sup-
plied goods and services. Also included are
the continuing effects from recycling income
back into the community that produces more
jobs, wages, and local taxes in the community.
The process begins with estimating the impact
on spending of the local wages, proprietor's
income, and taxes estimated in Phase I. The
Consumer Expenditure Survey (CES) provides
an estimate of consumer spending patterns on
locally produced goods and services. The
spending input is converted into local output,
which can again be converted into local busi-
Permanent Impact is addressed in Phase III.
Roughly 30 percent of the new home-owner's
income is captured by local businesses and
workers as the occupants of the new home buy
clothing, food, and entertainment. In turn, that
spending causes its own ripple effect as local
businesses buy from other local businesses.
The impact of a new household causes a perma-
nent increase in the level of economic activity,
jobs, wages, and local tax receipts. The third
phase of the model begins with the income of
new home occupants and follows local spend-
ing patterns through multiple income-spending
iterations. The income of new homebuyers and
renters is disaggregated into spending on 47
locally produced commodities using CES data
for new home occupants. As in Phase II, the
initial impact of spending is fed into an input-
output table, generating income and taxes that
are fed back into the CES local spending ten-
dencies to generate additional waves of eco-
nomic activity. The total effect is the sum of
The NAHB developed data for an "average"
city in the United States and then exercised the
model to show the economic impact of building
1,000 single family homes. The results are
shown in the following table.
Economic Ia o 1II0I00 ewSi gl Famil Detached Homes
For additional reading on the subject
Emrath, Paul. Local Economic Impact of
Home Building. Housing Economics. National
Association of Home Builders, Washington,
DC. March 1997. Pages 5-9.
The Local Economic Impact Model was
developed by the Economics, Mortgage Finance
and Housing Policy Division of the National
Association of Home Builders in Washington,
DC. (800-368-5242) This same division of the
NAHB publishes Housing Economics monthly,
which was the source of most of the material
presented in this newsletter. To subscribe call
Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose of
discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.
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