This Nails It: The Doom Loop of Housing Construction Quality

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Add in the doom loop of an unprecedented credit-asset bubble and housing as a sector is in trouble.

Sorry for the punnish-ment, but this nails it: How Contracting Work Became a Race to the Bottom The reality of being a contractor includes labor shortages, brutal competition and low, low margins.

This is not a new or unique trend, but it’s accelerating into a Doom Loop where the resources needed to reverse the decay are no longer available at the needed scale.

As a former builder, I experienced this same dynamic back in the 1980s, after the 1981-82 recession gutted the auto and construction industries. The 1981-82 recession was the deepest economic decline since the Great Depression in the 1930s, as the Federal Reserve jacked up interest rates to snuff out the inflation expectations that were becoming embedded in the economy.

Sectors that depended on consumer borrowing–autos and housing–tanked. Contractors’ sunk capital–the investment of time and effort required to learn the tradecraft, the financial investment in tools and equipment, office leases, etc. and the social capital of relationships forged with subcontractors, suppliers, lenders, etc.–is substantial and not easily replaced.

So everyone in the trades tries to survive the downturn by cutting costs, as the alternative–walking away from the construction industry and trying to establish a new career in a field that pays as well as construction–was difficult enough in good times, but in a recession became nearly insuperable.

The building trades are unique in a number of ways. Skilled labor still commands a higher-than-average wage, which offers a rare leg up for those (mostly men due to the physical demands of the work) with little interest or aptitude for classrooms or white-collar office work.

While manufactured housing and kit homes have been around for decades (Sears sold kit homes in the early 1900s with great success), the trades cannot be fully automated. Housing is one of the few things that’s still expected to be durable, and so as dwellings age, repairs are needed, and each situation has both commonalities with similar repairs and aspects unique to the specific problem.

All dryrot is the same, but each instance of rot is unique, and it takes a great expanse of varied experience to figure out the most efficient and effective solution.

Those with deep tradecraft skills are naturally reluctant to abandon their livelihood, but recessions leave many with no choice. Before giving up, contractors will lower their bids to get work just to pay the bills, never mind make a profit.

Offices can be given up, but there isn’t much fat to be cut out of bids, as labor, materials and overhead expenses cost what they cost.

There is one big expense that is temptingly open to arbitrage: labor overhead, the non-wages costs paid by employers for tradecraft workers. Due to the physicality and inherent risks of construction, injuries are common and so construction workers compensation insurance rates are high–generally between 25% and 50% of the hourly wage, but can approach 100% for high-risk work categories.

There’s a raft of other labor overhead expenses: disability insurance, unemployment insurance, and the employer’s share of Social Security, currently 7.65%. In recessions, state unemployment funds are drawn down and so the rate paid by employers increases sharply to replenish the fund.

Some states mandate healthcare insurance coverage for all full-time workers (or all employees working more than 20 hours, etc.), which is another labor overhead.

Add these up and the cost may equal or exceed the wages paid to the worker. To pay a worker $25 an hour, the contractor is paying $50 per hour. So to survive lean times and not go bankrupt from a low bid, contractors either pay workers cash (i.e. under the table) to avoid paying the labor overhead, or they hire quasi-legal subcontractors who do the same thing–pay all their workers as 1099 independent contractors who are responsible for their own insurance, Social Security taxes, etc.

The subcontractors aren’t paying their workers $50 an hour, they’re paying them $25 an hour, and the 1099 workers don’t pay any overhead except the Social Security / Medicare taxes, if that.

This was my experience in the early 1980s as the Great Recession crushed new housing and remodeling. The only contractors who made money were those who avoided paying labor overhead. The rest of us scraped by doing all the work ourselves or we lost money. (The old joke: we lose money on every job but we make it up on volume.)

As the article describes, the same dynamic gutted the sector in the aftermath of the 2008-09 Global Financial Meltdown, with one key difference: many of the older, experienced tradecraft workers have retired or left the construction industry, and the people doing the work now often lack the kind of deep, varied experience needed to do work above the most routine kind.

I’ve discussed the crippling long-term consequences of this under-competence at some length: workers are trained just enough to competently complete routine tasks, but they lack the training and experience needed to problem-solve / do demanding work outside the narrow boundaries of routine tasks.

The Catastrophic Consequences of Under-Competence (8/17/24)

Automation Institutionalizes Mediocrity (2/14/25)

The soaring costs of materials and construction-related regulatory burdens have now systemically optimized construction-worker under-competence as contractors cannot afford to hire competent workers and still win bids. Homeowners facing sticker-shock on bids for repairs, additions and remodels gravitate to the lowest bid regardless of such niceties as contractors paying all the required labor overhead.

The combination of high costs, optimization of under-competence and the scarcity of truly experienced workers generates a doom loop: shoddy workmanship and low-quality materials cause leaks, but few have the experience to make the needed difficult repairs.

The cultural penchant for McMansion-style homes with complicated roofs generate more opportunities for slipshod workmanship to cause leaks, and the substitution of cheap materials adds to these risks, many of which remain hidden until major damage has been done behind the drywall or siding.

McMansion-style homes built in a hurry by inexperienced crews may pass the purchaser’s home inspection, but harbor defects that will manifest later as horrendously costly repairs.

As for who can do the work competently and on time–good luck finding “old timers” who are still in the trades. Those few who can do the work have high costs and are often booked far in advance, and so they can charge a premium. As a result, you hear about roof replacement bids in the $40,000 to $60,000 range–sums that would have been considered astronomical in decades past.

Many homeowners can’t swing the costs of repair, so the house rots away.

Personally, I wouldn’t do any work in this environment by bid; I’d only work by the hour. This requires an element of trust in the contractor to not pad the daily expenses, but unfortunately it’s boiling down to either take a chance on the low bid, knowing the workers are likely getting stiffed because the labor overhead costs that protect them aren’t being paid, or the customer pays the contractor the full costs plus a fee for their time and expertise.

There aren’t many old hands left in the trades who have the decades of experience necessary to do a wide range of tasks.

Add in the doom loop of an unprecedented credit-asset bubble and housing as a sector is in trouble. Here’s a snapshot of housing affordability, which is in the basement:

The monthly payments are at historic highs, while the cost of non-mortgage expenses such as home insurance and property taxes soar.

If you can find an old hand who’s still working, don’t try to chisel their price down or hurry them. Be grateful you’ll only pay once, cry once rather than pay later and cry a river.

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Source: http://charleshughsmith.blogspot.com/2025/04/this-nails-it-doom-loop-of-housing.html