Home construction has broad economic impact

I’ve been consulting for the Greeley Economic Stimulus Committee for the past several months. I also make presentations to groups interested in stimulating the Greeley area economy by stimulating cash flow to construction industry subcontractors and related retail and other businesses.

My specific responsibility has been to determine the economic impact on the Greeley and Weld County economy of building new homes priced under $300,000.

The Stimulus Committee is targeting such construction because new homes in this price range are selling, with only a 60- to 90-day supply currently available.  That means the new residents coming to fill Weld County’s new jobs who want to buy a new home will find the supply limited. The problem is the Northern Colorado housing market is overbuilt in the upper price ranges, over $300,000, a condition supported by a robust economy, but not by the current recession-recovering economy.

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Greeley and Weld County will be adding more than 1,000 jobs soon, approximately 40 percent at salaries above $50,000.  Leprino Foods will soon begin a five-year, three-phase construction and plant operation project; JBS USA is moving Pilgrim’s Pride corporate operations to Greeley from Texas and bringing transportation operations in-house; and the Vestas plant in Windsor continues to receive new orders for wind-power blades. Assuming secondary job impacts, that’s over 2,000 new jobs in Weld County in the next five years.

These are all primary jobs, increasing the manufacturing base of Northern Colorado.  These are the jobs every community wants to have, jobs producing product for export outside the region.  The products flow out; the money flows in to pay for the primary jobs and stimulate secondary jobs.

Since many of the employees accepting these new positions will be new residents, new housing inventory must be planned to meet their demand, primarily in the lower-priced end of the market where supply is already tight.

So, what’s the impact of building a single-family home priced under $300,000?  Let’s look at a house marketed at $285,000, including all construction costs, normal profits and approximately $28,000 in development fees.

There are at least 35 separate businesses involved in acquiring and developing the land and building and marketing the home, and at least 120 site visits.  Thus, construction of each home involves a lot of economic activity and generates the impression of a robust economy.

Determining economic impact

There are five major steps involved in determining this economic impact.  The first step was to get a construction budget, which was provided by the Clarkson Group.  Then each expenditure was assigned a six-digit North American Industrial Classification System code.  The NAICS codes were aggregated into the two- and three-digit input-output model sector codes.  The expenditures were then entered into the model for Weld County, and the more than 30 expenditures from the budget were aggregated into 11 IMPLAN sectors.

Leakages outside Weld County were minimal: 67 percent of building material expenditures and 74 percent of electronic and appliance expenditures.  The reality was that local subcontractors were used, greatly increasing the local economic impact.  So, after leakages, 91 percent of expenditures remained to circulate within Weld County.

The output multiplier for this scenario was 1.23, which means that construction of a $285,000 house creates about $350,000 of output in Weld County.  Construction of the home creates about $90,000 of labor income which, using a multiplier of 1.21, creates about $110,000 of labor income in Weld County.  It takes about 2.5 man-years of labor to construct this home, 1.88 man-years of direct labor and the rest secondary labor impacts.

In addition to $28,000 in development fees, Colorado, Weld County and the city of Greeley recover total taxes of more than $11,000 from the economic activity associated with constructing this home. The share of taxes flowing to each governmental entity was difficult to quantify, but we estimate the city probably recovered just over $3,000.

Once the home is constructed, property taxes must also be paid; on this home we estimated about $1,400 per year.  Of this amount, approximately 18 percent flows to the city; most goes to the school district.  The present value of this tax amount over five years at 5 percent interest is nearly $7,500.

The goal of the committee was to stimulate the construction industry.  Waiver of part of the development fees is an obvious starting point, so discussions with various groups have revolved around how this might be accomplished without endangering future development infrastructure, providing the right incentives to home-buyers, and covering current local government operating costs.

If construction of 400 homes was authorized with equitable incentives, there would be $96 million of direct expenditures in Weld County, $120 million would be added to Gross Regional Product, $42 million of labor income would be generated, 992 jobs would created, and numerous subcontracting businesses would be saved from bankruptcy. A worthy goal indeed.

John W. Green is a regional economist who compiles the Business Report‘s Index of Leading Economic Indicators. He can be reached at jwgreen@frii.com.