For small business, home is no longer where the heart is.
The housing bust and subsequent recession hit small businesses the worst.
For too long, the housing industry has been an industry of and for small businesses.
To understand the structure of an industry, economists look to concentration ratios. The concentration ratio shows if an industry comprises a few large firms or many small firms. For example, a four-firm concentration ratio, the most commonly cited, gives the total market share held by the four largest firms.
Federal regulators consider concentration ratios when judging the benefits of announced mergers. A merger suspected to increase the concentration within an industry, and thereby the potential pricing power of the dominant firm or firms, will get more scrutiny and sometimes be blocked.
The housing industry has no clearly dominant firms. According to the most recent data from the Census Bureau, the real estate industry has more than 300,000 firms nationwide, and the four largest firms constitute only about 5 percent of total sales.
Compare this to the airline industry, as just one example.
There are more than 5,600 air transportation companies in the U.S., but the four largest carriers have more than 45 percent of all revenue.
The Census Bureau does not even calculate concentration ratios for the construction industry because it is so fragmented and diverse.
According the Bureau of Labor Statistics’ Occupational Outlook Handbook, at least a third of all carpenters and a fifth of all construction laborers, roofers and electricians are self-employed.
While improving, the construction industry still has the nation’s highest unemployment. The unemployment rate for construction and extraction occupations is more than16 percent, well above the overall U.S. rate of 8.7 percent. The national construction industry has lost more than 2 million workers since its peak in 2007.
While the unemployment rate in the construction industry is still very high, it has come down from last summer, when it topped 20 percent. Meanwhile, the unemployment rate for self-employed workers is rising, from 5.6 percent in May 2010 to 6.1 percent today.
Clearly, the multiyear depression in home building and housing prices has become a multiyear depression for small businesses. Much of this loss is tied to homeowners’ equity.
Many owners of small businesses turn to their homes for financing. Home-equity loans are frequently a source of start-up capital.
The home–equity credit lines of many small-business owners are now frozen because of declines in housing prices.
While consumer spending has held up pretty well, many consumers don’t have the spending power they once did when they also could tap their home-equity lines for all types of purchases.
The housing gravy train is gone. Innovation must drive small-business success from here.
Successful small business owners differentiate their product or service and don’t compete on price. Consumers usually have a single good reason to purchase from a small business — a unique product or great customer service.
Small-business owners need to put their heart in their own business ideas, not the value of homes.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa