Housing's Labor Shortage

Late last year, Richard Dugas of homebuilder Pulte  (NYSE: PHM  )  noted that his company was having trouble hiring enough workers to keep up with demand. "The number of markets feeling some degree of labor pressure is growing," he said. "In fact, almost all of our markets have now reached a point where labor pressures are being experienced to some degree."

Yesterday, Catherine Rampell of The New York Times detailed a similar problem: 

In many areas, builders are scrambling to ramp up production but face delays because of the difficulty of finding construction workers and in obtaining permits from suddenly overwhelmed local authorities.

This makes sense. Homebuilders laid off a ton of workers during the housing bust. And while rebounding customers can put in orders for new homes quickly, hiring a crew of skilled construction workers takes time.

But this story is more complicated than it looks. Compared with the drop in construction permits, homebuilders actually didn't lay off as many construction workers during the bust as you might think:

Source: Federal Reserve.

Neil Irwin of The Washington Post explains:

Key to understanding the sluggish growth in construction jobs is a concept called “labor hoarding.” That’s what happens during a recession when companies don’t fire as many workers as the decline in business would seem to have justified. Firms don’t want to lose all their quality workers and then be unable to keep up with demand when business finally turns around, so they keep people on staff even when there is not enough work to keep them fully busy.

This seems to have happened on a large scale in construction in the last few years. Kris Dawsey and Hui Shan at Goldman’s economics research group calculated that the economic value added per construction worker fell from $80,000 in 2006 to under $60,000 at the end of 2012. That is labor hoarding in a nutshell.

Construction can now rise much faster than employment because we're coming off of a period when construction fell much faster than employment. Last year, Lennar (NYSE: LEN  ) CEO Stuart Miller said, "The homebuilding business is beginning to revert to normal, and that's positive for the U.S. economy in general." Jeff Mezger of KB Home (NYSE: KBH  ) said, "We're on offense and pursuing our growth targets." This is great for news for homebuilders! But it doesn't necessarily mean they need legions of new construction workers. 

But how does that fit in with stories about a tight labor market? Here's the key, from Rampell:

Many workers in the immigrant-heavy industry have left the area [California], returning to Mexico and other points south. Others pursued work in Texas’s energy boom, where both drilling and construction jobs have become more plentiful. Those who stayed in the local area often switched to medical data entry, U.P.S. delivery services, or anything else that they could find. Or they filed for disability and dropped out the labor force altogether.

So, it seems homebuilders are looking to hire a small number of workers -- not a lot, because they didn't fire that many compared to the drop in business during the bust. But they're even having a hard time doing that, because so many experienced construction workers left the industry altogether.

That's important because, as I've written here more times than I can count, housing construction will likely need to rise far above current levels -- perhaps double the current rate -- over the coming years in order to keep up with demand fueled by demographics. What's going to happen when homebuilders try to hire large numbers of construction workers? If they're having trouble hiring at the margins today, it might be a nightmare.

Eventually it will work itself out, through higher wages and increased immigration. But it shows how far the housing market has come. A year or two ago, the industry's biggest problem was that it didn't have enough demand to build homes. Today, it's that it won't have the resources necessary to keep up with demand. 


Read/Post Comments (11) | Recommend This Article (9)

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  • Report this Comment On March 21, 2013, at 3:24 PM, Thaeger wrote:

    MH wrote: "Eventually it will work itself out, through higher wages and increased immigration."

    A related article, focusing on the skilled labor 'gap' in general; namely, how such gaps seem to go hand in hand with a reluctance to embrace Econ 101 and increase wages ( http://www.nytimes.com/2012/11/25/magazine/skills-dont-pay-t... ):

    "At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour...

    ...In a recent study, the Boston Consulting Group noted that, outside a few small cities that rely on the oil industry, there weren’t many places where manufacturing wages were going up and employers still couldn’t find enough workers. “Trying to hire high-skilled workers at rock-bottom rates,” the Boston Group study asserted, “is not a skills gap.”

    The study’s conclusion, however, was scarier. Many skilled workers have simply chosen to apply their skills elsewhere rather than work for less, and few young people choose to invest in training for jobs that pay fast-food wages. As a result, the United States may soon have a hard time competing in the global economy. The average age of a highly skilled factory worker in the U.S. is now 56..."

    -----

    Kinda an interesting take; ironically, depressed wages are one of many factors driving increased increased US competitiveness today. OTOH, I read these sorts of articles, and find myself more skeptical of government spending aimed at closing the 'skilled labor gap.'

  • Report this Comment On March 21, 2013, at 3:47 PM, FoolMeTw1ce wrote:

    It's important to remember that non of the major home builders' employees ever lift a hammer on the job. They employ land developers, general contractors, some architects, IT, and sales and marketing teams... the sub contractors, the teams actually swinging hammers and laying pipes, simply found themselves out of work. No one actually had to fire them- they are independent contractors. If you add the sub contractor stats to the "construction employment" red line, above, I'm guessing it will correlate much better to the housing permits trend.

  • Report this Comment On March 21, 2013, at 4:39 PM, Johny205 wrote:

    Fool Me Twice, I totally agree with you. I had been in construction 13 years, as an employee, subcontractor and general contractor. Like you said the subs are the ones who are self employed. With workman's comp being very expensive, such as 17-21% for carpenters and up to 70% for roofers, you can't afford to have any employees. You have the guys that work for you full time start an LLC and get their own liability insurance and then pay them by the unit. The good thing about the downturn in the housing market is that it weeded out a lot of people that shouldn't have been there in the first place. I never had much of a slow down; I shifted from all new construction to all remodeling around 2007 and have always been extremely busy. The guys sitting by the phone, waiting for their phone to ring, and the guys that can't shift geers, or do more than 1 trade are the ones that couldn't find work for a few years.

  • Report this Comment On March 22, 2013, at 3:51 AM, Zombie111 wrote:

    I am not sure how efficient the market is when these boom and bust situations happen repeatedly. A similar thing has happened in other countries. Owing to a series of earthquakes in my city we have a huge demand for builders and other trades, to the extent that we are importing workers from Ireland, the UK and Philippines, as many of the locals went overseas. One big problem is that they imported people need housing and are in competition with the locals.

    Also, construction has a history of companies collapsing and leaving sub-contractors out of pocket as unsecured creditors. It does not lead one to encourage one's children to become a builder or tradesperson.

  • Report this Comment On March 22, 2013, at 8:31 AM, Darwood11 wrote:

    FoolMeTwice: "the sub contractors, the teams actually swinging hammers and laying pipes, simply found themselves out of work." That is right on. Some builders keep a core of tradesmen on the payroll as "foremen" and "supervisors" but the others are subcontractors. They don't show up in the statistics when the builder pulls back.

    Thaeger: "The average age of a highly skilled factory worker in the U.S. is now 56..."

    That is the larger problem. There are all kinds of shortages now in manufacturing and it's interesting how diverse these shortages are. From windmill (windfarm) technicians to machinists and even skilled tradesmen. As an example, there is a big difference between an electrician trained in house wiring #14AWG at 120V in Romex or thinwall conduit, and an industrial electrician skilled at dealing with voltages up to 4160V, metering and protective systems, controls, and power distribution. Not to mention heavy wall conduit and pipe threading and bending.

    This extends to plumbers and fitters, too. PVC and copper is completely different than schedule 40 pipe, etc. It takes special training and experience to be a good field welder.

    My point is, there are some really interesting shortages out there and I don't see them going away any time soon. Want a skilled electrician? The requirements to get to a journeyman level for inside construction via the IBEW apprenticeship program for electricians is 5 years, as I recall. Training continues from there and will take a lifetime of continuous education.

    It's reached the point where today, my customers can't find the skilled tradesmen they need.

  • Report this Comment On March 22, 2013, at 8:42 AM, TMFMorgan wrote:

    Folks, the chart shows "construction" employment, not "homebuilder" employment. It's everyone involved in the industry, including those swinging hammers.

  • Report this Comment On March 22, 2013, at 9:05 AM, Darwood11 wrote:

    In the "related shortages" area, here's the title of an online article in the WSJ 3/21 which also appeared in print on 3/22:

    "Plywood Becomes Hot Item in Housing Recovery"

  • Report this Comment On March 22, 2013, at 9:18 AM, Darwood11 wrote:

    The St. Louis Fed has a slightly different graph of "All Employees: Construction (USCONS)"

    It is probably the one I think of because it shows employment dropping from a peak in 2006-7 of 7.7 million to about 5.8 million today. That's a decrease of about 25%.

    http://research.stlouisfed.org/fred2/series/USCONS

  • Report this Comment On March 22, 2013, at 9:28 AM, TMFMorgan wrote:

    Darwood, I used the same data. My chart is normalized at 2006 = 1 so that it is on the same scale as housing permits. Note that my chart shows a decrease of 25% as well (as 2006 was near the peak)

  • Report this Comment On March 23, 2013, at 10:07 PM, HireaMan wrote:

    We have employers looking to hire construction workers immediately, please complete a profile questionnaire and start getting job offers here http://www.hireaman.com/job-seeker/register

  • Report this Comment On March 31, 2013, at 4:31 PM, earlyseller wrote:

    How about returning vets to fill construction jobs?

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