Wednesday, February 10, 2016

Five-Year Failure Rates for Remodeling Contractors Exceeded 50% During Downturn

Abbe Will
Research Analyst
Newly available data from the U.S Census Bureau confirms that the severe drop in home improvement spending that accompanied the housing market crash and Great Recession put a great many remodeling contractors out of business. Although remodeling businesses of all sizes experienced very large failure rates, smaller-scale businesses, which are most typical of the industry, were considerably more likely to fail during the downturn.

Utilizing the longitudinal nature of the Census Bureau’s Business Information Tracking Series (BITS), it is possible to calculate failure and survivorship rates of construction businesses with payrolls during the last economic downturn from 2007-2012. According to custom tabulations commissioned by the Remodeling Futures Program, fully half (51.0%) of general residential remodeling businesses in 2007 were no longer operating by 2012. New housing construction businesses suffered similar exoduses: 52.6% for single-family builders and 52.2% for multifamily builders. Specialty contractors, however, such as roofing, electrical, and plumbing and HVAC specialists experienced much lower five-year failure rates ranging from 33.1% for plumbing/HVAC specialists to 39.1% for roofing companies. These lower failure rates are not surprising since the specialty trades also include contractors that serve the non-residential construction sector, which did not suffer the same steep declines as the residential market.

Business size is a significant indicator of failure or survival. An astounding seven in ten residential remodeler establishments with $100,000 or less in business receipts in 2007 were no longer in operation by 2012 (Figure 1). The failure rate, while still high, drops sharply to one in four for the largest remodelers in 2007 with $5 million or more in receipts. Businesses surviving the industry downturn were in fact larger: 61.1% had receipts of $250,000 or more in 2007, while almost the exact same share of remodelers that did not survive (62.1%) had revenues of less than $250,000.
Source: US Census Bureau, 1989-2012 Business Information Tracking Series.

Interestingly, of the general remodelers that were able to remain in business during the steep industry slump, over 45% did so even as their business receipts dropped by 25% or more (Figure 2). Another 16% experienced lesser declines in revenue from 2007-2012, but declines nonetheless. Surely, the relatively larger scale of surviving remodeling companies provided important cushions for riding out the cycle. The rest of remodelers that remained in business over this period, about 40%, were able to successfully scale back, restructure, or otherwise take advantage of reduced competition to actually increase their revenues during the worst industry downturn on record. The vast majority of these remodeling contracting businesses saw receipts increase by 5% or more from 2007-2012.
Source: US Census Bureau, 1989-2012 Business Information Tracking Series.

These multi-year failure and survivorship rates mask the full dynamics of business openings and closings, however. In 2003, heading into the housing and home improvement boom years, about 18% of residential remodeling establishments were new businesses. In 2007, at the peak of the market, this share stood at 16%. During the trough years of this past business cycle, the share of remodeling businesses that were start-ups barely budged at 15-16% in 2008, 2009, and 2011. One-year failure rates during the same periods have ranged from a low of 12.9% in 2004 to 19.8% in 2009 and 14.4% at last measure in 2012. Indeed, in any given year and at all points in the business cycle, the remodeling industry experiences substantial churn of business entrances and exits.

It is important to note that the BITS database is of payroll businesses only and as such does not track movement from payroll to non-payroll, or self-employed, businesses, which is likely a common occurrence for many smaller contracting companies serving the remodeling industry. According to Joint Center tabulations of the 2007 Economic Census of the construction industry, nearly a quarter of general residential remodelers had less than $100,000 in receipts and the average business of this size had 0.93 payroll employees, indicating that some of these firms were without employees for at least a portion of the survey year. Another 27% of general remodelers had revenues of $100,000-$249,000 in 2007 and only 1.64 employees on average.

Certainly, some part of the calculated “failure” rates cited above is due to payroll businesses moving to self-employed status rather than actually going out of business. Indeed, the term “failure” is used only as shorthand to mean the establishment ceases to exist in the BITS database and not necessarily that the business failed to generate enough revenue to cover expenses. In addition to conversion to self-employment, other non-failure reasons for a business to cease to exist in the BITS file could include retirement of the proprietor or sale of the business to another entity.

Wednesday, February 3, 2016

The Future of Renting Among Older Adults

Jennifer Molinsky
Senior Research Associate
Since 2005, the number of renter households aged 50 and over has increased dramatically, jumping from 10 to nearly 15 million, and accounting for more than half of all renter growth over the past decade, as my colleague Dan McCue pointed out in a recent post. This is not just a result of the large baby boom cohort passing age 50, but is also a distinct increase in the rate at which older adults are renting. As these trends are likely to continue, it’s concerning that the nation’s current supply of rental housing suitable to the needs and preferences of older renters is insufficient, particularly in relation to affordability and physical accessibility.

The baby boom cohort, now aged 50-69, is responsible for most of the increase in older renters. In the last decade, the boomer generation fully passed into the 50+ category, and going forward, this cohort will continue to drive up the number of renters in their 70s and beyond (Figure 1).
Notes: Projected renter growth assumes constant homeownership rates by age, race, and household type.  Constant rates are the average of rates from 2014 and 2015. Historical growth uses 3-year trailing annual averages to reduce volatility.
Sources: JCHS tabulations of US Census Bureau, Current Population Surveys and 2013 JCHS household growth projections.

However a growing older population is only part of the story: more than half the growth in older renters stems from a decline in homeownership and subsequent increase in the share of those 50 and over who rent, a legacy of the foreclosure crisis and recession. As our 2014 report on housing for older adults noted, the homeownership rate for 50-64 year olds slipped 5 percentage points between 2005 and 2013—a larger drop than in the nation’s overall homeownership rate over that period. For these owners-turned-renters, transitioning back to homeownership can be especially difficult as retirement approaches: the imperative to save for retirement may take precedence over saving for a downpayment, while weak credit may make it difficult to obtain a mortgage. Though some may make their way back to homeownership despite these challenges, it is likely that the higher rentership rates among the boomer cohort will persist as the group ages.

While the recession pushed many into renting, other older homeowners are transitioning to renting as a choice. For these owners, rentals may offer a smaller, more cost-effective option that demands less time, physical effort, and money to maintain. As mobility limitations increase with age, older owners also turn to renting to obtain more accessible housing, with features like single-floor living, no-step entries into the unit, walk-in showers, and other universal design elements. As the large baby boom population enters the 70-plus age range in the next decade, we can expect a swell in the number of older renters seeking accessibility features that can enhance safety in the home, independence, and quality of life.

It remains to be seen whether baby boomers will elect to make these moves earlier than their predecessors. With growing interest in walkable communities, proximity to transit, and back-to-the-cities living, we may see earlier turns to renting as a choice. But even if not, the sheer growth in older households and the falloff in owning compared to previous generations at the same age indicates strong growth in older renter households going forward, even absent further declines in homeownership.

The question then is whether the nation’s supply of rental units is suited to the needs and preferences of older renters. Like renters in general, older renters have lower median incomes than their home-owning counterparts. But since incomes decline in retirement, older renters also have lower median incomes than renters in general (Figure 2). Lower incomes leave a significant share of older renters vulnerable to housing cost burdens. Indeed, 55 percent of renters aged 65 and over are cost burdened, spending more than 30 percent of their income on housing, including 30 percent who spend more than half their income on housing. Older cost-burdened renters typically spend less on food, healthcare, and transportation – and for those in their 50s and early 60s, save less for retirement, threatening financial security down the road.

Notes: Real Median Incomes are as of 2014 and have been adjusted for inflation using the CPI-U for all items.
Source: JCHS tabulations of US Census Bureau, 2015 Current Population Survey.

As noted below, older renters are more likely to have disabilities than younger renters, as well as homeowners of the same age (Figure 3). Yet the supply of accessible units is limited; less than 1 percent of US rentals include five basic universal design features (a no-step entry, single-floor living, wide hallways and doors, electrical controls reachable from wheelchair height, and lever-style handles on doors and faucets). Units in newer, larger buildings are apt to offer more, yet still, just 6 percent of units in buildings constructed 2003 and later, and 11 percent of units in larger apartment buildings with 20 or more units, offer all five of these features. And newer rentals tend to command higher rents, leaving them out of reach to lower-income households with disabilities.

Notes: For individuals age 15 and older, a disability is defined as a hearing, vision, cognitive, ambulatory, self-care, or independent living difficulty. White households are non-Hispanic. Includes non-group quarters population only.
Source: JCHS tabulations of US Census Bureau, 2012 American Community Survey.

Indeed, older adults seeking housing that is both affordable and accessible face particular challenges. The current affordable stock tends to be older and located in smaller multifamily buildings that are the least likely of any rentals to offer accessibility features. Two-fifths of renter households in their 50s and 60s live in apartments in small buildings with 2-9 units (Figure 4), which are among the oldest and least accessible units in the entire rental stock. Meanwhile, over a third live in single-family rentals whose accessibility varies widely by region, with renters in the Northeast and Midwest at particular disadvantage for single-floor living.

Source: JCHS tabulations of 2013 American Housing Survey, US Department of Housing and Urban Development

In addition to lower-cost and more accessible rentals, we will likely see an increase in demand for rentals with services that enhance older adults’ quality of life. Many older adults are not in need of assisted living or skilled nursing care, but could benefit from services such as transportation, laundry, or housekeeping that can support independent living into older ages. For lower-income adults, service-enhanced housing, where services are provided onsite, or service networks that support older renters scattered in multiple locations, can fill a role that their higher income peers can obtain through “village” membership organizations or the more independent portions of continuing care retirement communities.

With renters 50 and over now comprising a third of the renter population – and renters 40 and over representing fully half – now is the time to consider the suitability of the nation’s rental stock for older renters and begin to address its shortfalls in accessibility and affordability. There is an urgent need to create more accessible units, through new construction or retrofit, suitable and affordable to older adults. This is particularly true for the oldest cohort, which has both the lowest median income of all renters and the highest rate of disability, and which will grow in size as the baby boomer generation ages into their 70s. Meanwhile, service-enhanced rental housing can play a critical role in extending independence and quality of life for those lower-income renters who do not need skilled nursing care or assisted living, but who could benefit from services that support independent living. 

Wednesday, January 27, 2016

Article review- “Patriarchy, Power, and Pay: The Transformation of American Families, 1800-2015”

George Masnick
Senior Research Fellow
At my age, there is little that makes my jaw drop, especially while reading an article in one of my professional journals. However, this is exactly what happened when “Patriarchy, Power, and Pay: The Transformation of American Families, 1800-2015” by Steven Ruggles appeared in the latest issue of Demography. (Another almost identical version of this paper is available free of charge here.) What struck me as amazing is the way Ruggles provides a long-term perspective on many of the demographic and economic trends taking place today that I have studied using a much shorter time frame. And by long-term, we are talking 150-200 years!

The Joint Center for Housing Studies' early effort to describe changes in household structure and the labor force participation of American womenThe Nation's Families, 1960-1990– adopted a temporal perspective from 1960-1990. Published in 1980, we thought at the time that a three-decade perspective was all that was needed to understand the dramatic changes of that era. Wrong! The longer historical perspective sheds much more light on the origins of today’s demographic shifts, particularly in household structure, and what they might mean for housing.

Ruggles begins with the trend in the share of persons age 65+ who live in multi-generational families. We have noted the increase in this household type during the past two decades, primarily due to the increasing share of Hispanic and Asian immigrants for whom multi-generational residence is more common, and have speculated about its implications for housing consumption. But since we housing researchers rarely look at trends spanning more than 30 or 40 years, we have no sense of whether the upward trend in multi-generational living is indeed all that significant.

Ruggles’ Figure 1, reproduced below, shows how slight the recent turnaround has been relative to longer-term historical levels. The high share of the labor force based in an agricultural economy drove the very high historical incidence of older Americans living in multi-generational households. Three quarters of the labor force in 1800 worked in agriculture, and farm labor still was in the majority in 1850 when the share of 65+ living in multi-generational families was also 75 percent. Ruggles explains convincingly why an agricultural based economy tied the generations together, and why the rise of wage labor off the farm split them apart.

Ruggles’ main theme is that the decline of what he calls the “corporate family” – those working in agriculture and other (often related) family businesses – and the gradual transformation of the workforce to include first only male breadwinners, and later dual earner and female breadwinner households – had the effect of making household structures both simpler and more fluid. Once again, his long-term perspective is enlightening in looking at the recent trend in such things as delayed marriage and divorce. Age at first marriage for both men and women has been rising steadily since 1960, and he predicts that the share of never-married 40-44 year old women will almost double in the near future, rising from 15 percent in 2010 to about 28 percent in 2030. Similarly, the rate at which married women are divorcing has increased steadily since 1960, showing no sign of this trend slowing. Consequently, the share of all households without a married couple present – which held near 20 percent between 1850 and 1950 – has risen to over 50 percent in 2010, and continues its upward trajectory.

Nor is it simply the case that young adults are just trading marriage for cohabitation. To be sure, this is happening to some degree, but Ruggles notes that the share of 25-29 year olds without a co-residing partner has grown from 23 percent in 1970 to 48 percent in 2007 to 54 percent today. The fastest growing household type is single-person rather than cohabiting couples, as more and more adults of all ages who never married, are separated/divorced, and are widowed live alone.

If the household is the unit of both production and consumption, greater fragmentation and instability in household structures is troublesome. The primary household production good today is the next generation, and the U.S. appears to be following the lead of many European countries in developing fertility levels below replacement. Nothing that Ruggles presents in his paper provides comfort that the recent declining fertility rates are simply due to the lingering effects of the Great Recession and will likely reverse themselves.

One contributing factor to declining fertility may be trends in income. Households have always provided the mechanism for combining incomes. To Ruggles’ dismay, the evolving global economy is leaving more American households without secure incomes. The long slide in the relative earning power of young men over the past 40 years has been mitigated by the steady rise in employment of wives. But now that fewer and fewer households contain a married couple, and given that women’s real wages have also begun to decline, aggregate household incomes for married couples has begun to decline as well. Ruggles suggests that the largest source of decline in economic opportunity for young people, especially over the past two decades and in future decades, may be the automation of both manufacturing and services made possible by new technologies.

Housing consumption broadly should follow the downward trends in employment and income. Boosting household formation and homeownership rates, especially among the young, will require a reversal of many of the long-term demographic and economic trends that Ruggles discusses.

Ruggles’ article has sixteen figures, some only going back in time to 1940, but many spanning 150 or more years. I highly recommend you take a look. Some will surely make your jaw drop too.

Thursday, January 21, 2016

Home Remodeling Activity Looking to Gain Steam Through Mid-Year

Abbe Will
Research Analyst
Expenditures for home improvements should see healthy gains in 2016, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The LIRA projects annual spending growth for home improvements will accelerate from 4.3% in the first quarter of 2016 to 7.6% in the third quarter. By then, the level of annual spending in nominal terms is anticipated to surpass the previous peak set in 2006.

2016 is looking to be a stronger year for home renovation activity compared to 2015 thanks to the continued recovery in the owner-occupied housing market. In most markets across the country, rising house prices are bringing more homes to the market and increasing sales, which is a large driver of home improvement activity.

The remodeling market has steadily improved in recent years with homeowners incorporating larger, more discretionary projects into their home improvement priorities. The real test this year will be whether the industry can clear ongoing bottlenecks in labor availability and consumer financing concerns to fully meet this increased demand.  (Click chart to enlarge.)

Notes: (e) – estimated; (p) – projected.  Historical data through the third quarter 2015 reflect significant revisions released by the US Census Bureau on 1-4-16. For more information, see: The fourth quarter 2015 is calculated using preliminary Census Bureau data and LIRA projections.
Source: Joint Center for Housing Studies of Harvard University. 

For more information about the LIRA, including how it is calculated, please visit the Joint Center for Housing Studies website.

Tuesday, January 19, 2016

Energy Consumption in the Residential Rental Sector, and Promoting Energy Efficiency

Elizabeth La Jeunesse
Research Analyst
With the recent release of our America’s Rental Housing report, as well as the landmark international agreement on climate change reached in Paris, we took the opportunity to revisit the question of how much energy is consumed by the residential rental sector, as well as to explore pathways to reducing energy usage by renter households. We will revisit this topic again with the release of the US Energy Information Administration (EIA)’s 2015 Residential Energy Consumption Survey (RECS). Meanwhile, here are a few facts about renters' energy usage, as well as ways renters' energy consumption can be reduced even further.

The residential housing sector has a sizable carbon foot­print, accounting for about 22 percent of national energy consumption and a similar share of energy-related domestic CO2 emis­sions (source: EIA website.). While the rental sector’s contribution to these emissions is smaller than the homeownership sector both in aggregate and on a per household basis, it nonetheless represents a sizeable share of residential energy consumption. According to results from the most recent Residential Energy Consumption Survey in 2009, renters were responsible for nearly a quarter of all residential energy use. On a per-household basis, renters living in single-family homes consumed 19 percent less energy than owner-occupants, while renters living in multifamily units consumed 29 per­cent less energy than owner-occupants. This lower energy use among renters reflects in part the smaller average size of rentals relative to owned units. However, while the 2015 RECS is not yet available, the updated data is likely to show higher ener­gy use by the rental sector because of increases in both the rentership rate and the share of single-family rentals.

The construction of new, more energy efficient units and loss or replacement of older units contribute to improvements in the energy efficiency of the rental stock over time. Based on our analysis of data from the 2009 RECS survey, we found that rentals built in the 2000s consumed 28 percent less energy on average than those built before 1980. Figure 1 below illustrates this trend, showing that newer single-family and multifamily rental units consume less energy compared to remaining, older units.

Figure 1
Note: Single-family excludes mobile homes.
Source: JCHS tabulations of US Energy Information Administration, 2009 Residential Energy Consumption Survey

However retrofits to existing units, especially those affecting the building envelope, windows/doors, appliances, and HVAC systems, also play an important role—and have more immediate impacts. As of 2009 the typical unit built before 1970 used nearly 25 percent less energy than same-age rentals in 1980. This substantial reduction in energy usage over time highlights the critical importance of retrofits to existing units for improving energy efficiency.

Figure 2
Note: Includes all structure types. Square footage includes all attached garages, all basements, and finished/heated/cooled attics.
Source: JCHS tabulations of US Energy Information Administration, 1980 and 2009 Residential Energy Consumption Surveys.

A variety of government and private initiatives currently target reductions in energy use in the rental housing sector. In particular, state and local building codes for energy efficiency provide a primary source of new regulations. These are influenced by changes in the International Energy Conservation Code (IECC), which continues to set higher standards for energy efficiency requirements in the building envelope, lighting, heating, and cooling. Federal appliance standards for equipment in residential/multifamily buildings are also tightening. Since 2009, fully 34 new or updated standards have been issued for products, estimated to cover 90 percent of residential energy use (source: US Dept. of Energy). Federal, state and local financial incentives, including tax deductions and credits, utility rebates and loan programs, also target reduced energy usage in rental properties.

In his research brief, "Reducing Energy Costs in Rental Housing," JCHS Senior Research Fellow  Michael Carliner highlights the pros and cons of these and other initiatives to reduce energy usage among renters. One emerging approach that bears particular promise is that of increasing access to energy usage information and related property performance data among renters and property owners. The idea is that greater transparency of energy cost information can incentivize renters and landlords alike to manage their energy consumption choices more efficiently, and to undertake cost-effective, energy saving investments. Energy usage data can even be ‘gamefied’ such that people voluntarily compete in the common effort to save energy—with real energy savings as a result (see ACEEE paper). For some examples of city-wide efforts to increase disclosure access to energy usage data, see Amy Morsh’s recent blog post at the Center for Climate and Energy Solutions.

While increasing access to information can help overcome market inefficiencies, major complications and trade-offs still remain in the quest to reduce renters’ energy consumption. With rental affordability challenges high and rising nationwide, one major question is whether property owners are passing the costs of energy-saving retrofits on to tenants. Structural feasibility is also a potential concern, since new appliance standards are not always compatible with what existing multifamily buildings can structurally accommodate in terms of HVAC sizing. Lastly, as discussed in the America’s Rental Housing report, efforts to improve the energy efficiency of the rental stock must also consider the location of rental housing units, which influences tenants’ travel options and transportation-related energy usage.

As the preceding discussion suggests, reducing renters' energy usage is a complex task with many possible ways forward, but also with many potential challenges and trade-offs. Ongoing and future efforts to improve the energy efficiency of the US rental stock ideally will take these complex factors into account, while balancing other critical policy objectives including rental housing affordability.