The position of the new residential construction sector as a large but very volatile component of total investment has provoked much study of the causes of that volatility and of its relation to the stability of the economy as a whole. There has never been, however, serious analysis of the assertion that this same volatility of housing starts, by creating an unstable environment for firms operating in the industry, serves to increase the cost of producing and marketing housing. This paper will focus on the phenomenon of demand instability as it affects firm behavior. It approaches the demand instability problem from two distinct but complementary perspectives. The first part sets forth a theoretical conception of the manner in which demand instability should influence any firm's organization and operations. The second part presents an analysis of interviews conducted with representatives of a number of firms which supply materials for residential construction. This analysis provides a partial test of the theory and offers insights into areas on which theory alone sheds little light.