Constraints on the supply of newly-built homes and communities is not letting up, nor is it likely to.
The biggest obstacle from the perspective of builders, as we've noted here, is land. It's hard to find, too expensive, and takes too long to entitle and permit. What's more, to some degree, the successful pace of sales in new communities across many geographies over the past couple of years served to make the issue worse. Solid sell-through and absorption on currently open communities forces a camel through the eye of a needle, as all builders need to restock "stores" that will sell out with new neighborhoods for next Spring and 2019, and 2020.
Labor's been and will be a cause celebre, and squeezes between the need to deliver and the accessibility of skilled trade crews along a give-or-take continuum of weather hiccups and other unforeseen delays can and do impact costs. A lot. It's been widely noted that shortages of roofers, framers, and other skilled workers chronically impede predictability on timing and price through the project cycle.
Less noted, but maybe of equal importance in the labor capacity equation, is a shortage of project superintendent-level skilled associates. This relatively young, profoundly important contributor to construction cycle management took a massive hit during the downturn, and it's the availability of this type of worker--one you can't train up in a day--that is not only holding back the ability to add new projects, but also impacts the efficiency and operational effectiveness and quality of some of the newer subdivisions actively selling now. This is a real-time cost-inflation driver, and it's one that makes builder firms themselves part of the labor capacity challenge.
When it comes to material input costs, lumber prices have hogged headlines. They're tied in with politics and trade wars since a lot of lumber comes into the U.S. from Canada, and predictability on both supply and price is volatile.
Still, material input cost inflation doesn't stop there. As Ivy Zelman and her analysis team at Zelman & Associates note in the latest The Z Report, pressures on land, labor, and materials have converged, driving construction cost inflation to a level it hasn't seen since May of 2014, 38 months.
The Z Report's latest August 11 issue notes that, while labor and lumber rank as factors private home builders regard as most "problematic" in driving cost inflation, other variables have crept into the picture. (You can access a free trial of this twice-monthly package of exclusive data and analysis by clicking here).
Unfortunately for builders, costs are rising elsewhere as well, with our indices for the other 12 categories all higher on a year-to-date basis, led by siding, paint, wallboard and roofing.
Of course, a business environment of upward pressure on costs impacts both present cash-flow and operating cost management as well as forward financial modeling that needs to mitigate risk to margins.
As Zelman experts note, builders have been more than able to absorb input cost inflation in their pricing up to now, but what happens when--not if--interest rates bump up a couple hundred basis points? There may not be all that price elasticity that we've seen underlying demand to date.
Other things to think about in light of a input cost inflation era are about both business model and operations management. On the business model front, obviously deeper, more expansive, and more concentrated area market scale yields local clout that may offset some of the upward pressure on material input costs. That works not simply at any given snapshot of a moment, but across time as well, since a "smoothing" of demand through each time increment can expose opportunities to take cost out of the supply chain.
So, scale--real, not hypothetical--is one counter-force to material cost inflation.
Another, related but separate mitigator is operational excellence, which harmonizes the take-down of resources with the ability to create value with them in the speediest possible duration.
This is where disciplines builders acquire from experiences such as Fletcher Groves' Builder Velocity Pipeline Workshops come into play. The next such event is taking place Oct. 18-19, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Fla.
Here's a rundown of key take-aways:
- a strong, visual image of a homebuilding production system – its purpose, its size, its cost, and its capacity.
- a simple, elegant, actionable understanding of how operating decisions drive business outcomes, and how the measures of operating performance connect to the business outcome measures of profitability and economic return.
- an ordered manner of thinking and reasoning – a set of mental models – about the relationship and interaction of the dependent parts that comprise a homebuilding production system, providing a systemic approach to solving production problems and managing finite production capacity, and a blended approach to process and project portfolio management that addresses the unique attributes and parameters of homebuilding production.
- a set of velocity accelerators – detailed information on tactics, techniques, and practices dealing with specific areas that affect production management, all of which contributes to less variation and waste, fewer errors, shorter schedules, reduced build/cycle times, increased production throughput, and controlled levels of construction work-in-process.
