Construction, Residential Building
SIC 1520
NAICS 2631
Contractors in this segment of the world's construction industry create new residential structures, including single- and multifamily dwellings, as well as additions, alterations, remodeling, and repairs to residential buildings. For details on other aspects of the construction trades, see also Construction, Nonresidential Building and Engineering Services.
While most residential buildings—whether for single families or multiple families—are constructed by local, domestic, small-scale operations, an estimated one-fifth of all construction worldwide is performed by large-scale companies. The international residential construction industry is dominated by well-funded U.S., European, and Pacific Rim (particularly Japanese) companies.
The early 2000s' decline in the Japanese and other Asian economies hit their domestic construction markets hard. The most telling sign of the financial times was the dramatic reduction in the amount of money Japan spent on construction. While the industry was strong in the early 1990s, by 2002 the number of new building contracts had significantly declined—largely because of concerns about high vacancy rates. Analysts projected that investments in Japan's domestic construction industry would continue to decline. Nevertheless, employment in the construction industry and the number of new small construction companies entering the tough market rose due to the fact that the government spent US$550 billion on public works in the mid-1990s. The economy continued to suffer in subsequent years, however, because of this and other deficit spending.
By the mid-2000s the Asian housing market had started to bounce back; housing starts in Japan increased in 2006. China and India also showed growth.
In the United States, the already slowing economy took a downturn after September 11, 2001. Many feared that this trend would take a catastrophic toll on the construction industry, since people in uncertain times generally stop looking to buy or build new homes, preferring the security of their existing housing. That the country witnessed widespread lay-offs seemed to ensure that housing projects would drop significantly. To the surprise of most industry analysts, however, residential construction proved quite resilient. In 2006, private housing starts in the United States totaled about 1.46 million units, after reaching the highest number since 1978 the year before (1.71 million). This growth, spurred by extremely low interest rates and an improving economy, reversed expectations of a market decline. According to figures reported by Mortgage News, the housing market—including spending from mortgage refinancing—contributed 33.8 percent of U.S. economic growth in 2003. In 2005 there were 1.6 new housing starts, but the market slumped as expected in 2006.
Global Insight Inc. forecast that surging demand in India and China would drive global construction growth at about 5 percent through 2012. Construction in India was expected to grow at about 9.2 percent, with China close behind at about 7.9 percent. Though demand for industrial and commercial construction would initiate this growth, an influx of workers to new employment sites would stimulate demand for more residential construction. In the United States, the construction industry was expected to grow more moderately, at about 4.8 percent, while the European industry was expected to see growth of about 3.9 percent.
Residential construction includes single-family houses, multifamily dwellings, and apartment buildings. The industry is highly fragmented: the United States and Japan combined hold approximately 1 million construction-related firms. The business also tends to be highly cyclical, reflective of changing demographic and economic factors like interest rates, property values, and the financial climate.
Residential builders are regulated in a variety of ways. Laws governing the habitats of wildlife (such as the Endangered Species Act in the United States) can impact builders, while regulations delineating criteria for energy efficiency, access for disabled persons, worker safety, and public safety also have to be taken into account. At the beginning of the new millennium there was little concern in the industry regarding antitrust violations because none of the domestic leaders accounted for a large segment of the market activity. Although 2001 saw two notable acquisitions (Pulte bought Del Webb Corporation for US$1.8 billion, and Lennar Corporation bought U.S. Home Corporation for US$1.2 billion), there was still ample room for growth by individual companies.
In Germany building plans for homes must conform to German industrial standards prescribing dimensions for stairways and other parts of a home. In some densely populated cities in Asia and elsewhere, however, evasion of building codes seemed almost a way of life, as owners and tenants thwarted safety plans through illegal subdivisions of apartments, obstruction of evacuation routes, and poor building maintenance.
Construction of housing, however, is a vitally important issue to virtually all countries, so most nations also support their residential construction industry through government programs and agencies. Many countries have institutions with responsibilities not unlike those of the Federal Housing Administration (FHA) in the United States. The FHA seeks to stimulate the residential home building industry by making houses more affordable through low-interest mortgages. Indeed, knowledgeable governments are aware that construction of all types accounts for increasing portions of the economic activity of developing countries.
Companies hoping to enter lucrative foreign markets typically boost their reputation and experience in three ways: by working first on public works projects, by building the overseas projects of domestic clients (particularly among Japanese companies), and by entering into joint ventures.
The earliest known houses date back to 9000 B.C., although there is earlier evidence for more crude forms of shelter. Constructed of mud and reeds, these structures featured circular stone bases and conical roofs. The use of reeds as a building material ultimately led to the discovery of structural elements such as the frame, the column, the arch, and the vault. Baked mud bricks allowed greater flexibility in house design and enabled the first rectangular houses to be built in the Jordan valley around 7000 B.C. This design endured as the dominant shape for Western houses. Five thousand years later, more sophisticated dwellings featured second stories and balconies, elements designed to address the demands of urban life. The Romans introduced apartment buildings as a means of accommodating many people in a limited space; the earliest apartments were limited to five stories or less by decree and had no kitchen or bathroom facilities. These early structures demonstrated an awareness of the trade-offs between efficiency and customization.
While the principles of modularity and standardization reached their peak perhaps in the post-World War II houses of the suburban United States, the need to rebuild Europe and East Asia after that war helped turn construction into the international industry it was in the early 2000s. U.S. contractors controlled 90 percent of the global construction market by 1956. Soon, however, western European firms were able to offer similar quality at competitive prices. Japanese contractors needed to import technology, but when they did, their lower wages and increasing productivity made them keenly competitive, first domestically and then in neighboring countries. Some of the first substantial international joint venture projects for the Japanese construction industry arose from work done for the United States in Okinawa at the beginning of the Korean War. Japan eventually emerged as a significant player in the world marketplace, successfully competing with U.S. and European firms for the abundant Middle Eastern petroleum facility contracts of the 1970s despite language and geographical disadvantages. South Korea later used low bids and other practices to maneuver its way to a position of international relevance as well. Turkey, Mexico, India, and China were poised to follow on the strength of inexpensive, productive workforces.
After a period of growth in the mid- to late 1990s, the residential construction industry began slowing toward the end of the 1990s and into the 2000s. This trend worsened considerably after the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001. Still, the industry remained in relatively good health, and by 2003 analysts were projecting moderate global growth through 2012. Worldwide, spending on construction (including housing and other projects) reached US$3.9 trillion in 2004, according to Global Insight Inc., and residential construction grew by a projected 6.6 percent. In 2004, the US$882 billion-a-year American construction industry accounted for almost 8 percent of the U.S. gross domestic product. The largest segment of this industry was in private sector residential construction, which generated more than US$453 billion worldwide in 2002.
Despite the general economic slowdown at the beginning of the new millennium, the U.S. residential construction industry was on the rise. In 2003, U.S...
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