Set your stopwatch, and hold me to an accounting for this prediction. As headlines now scream about "bidding wars," you can bank on an equal or greater amount of clamor by, say late September or so, that the housing recovery may be losing its vigor as builders resort to discounts and alluring free upgrades to keep to their pace and volume goals.
The bidding wars story may well be a phenomenon worth noting in the couple of dozen markets Realtor.com examines in its analysis of for-sale inventory changes and time-on-the-market. It's the stuff of headlines, but it's not the stuff of the trenches of home building, which has become more of a just-in-time type of market, which spreads supply risk and demand risk more even-handedly, and with the possible exception of higher-end new homes, doesn't tilt the playing field much in favor of either the builder (who's making a profit) or the buyer (who's getting more value for his luxury home dollar).
The big issue of the moment for home builders is who's going to be able to make money and who's going to lose money in the current environment, which continues to be geographically spotty, and choppy in its time-line, iffy in its outlook, and stingy in its overall trajectory.
Think of a new home as a microcosm of the GDP.
There are five big areas of cost that go into a new home, whether it's built by a small company or a multi-regional enterprise.
2. Directs (labor, materials, manufactured products)
3. Indirects (overheads, expenses related to keeping business going)
4. Time (including opportunity cost of not doing something else)
5. Money (cost of loans, investments, financing)
All five cost areas are rife with uncertainties, unpredictabilities, and potential challenges, so that even after a home builder has a buyer deposit in hand and green-lights the start, it's work in process where the fun only begins. All five of those cost areas subtract out that portion of resource, capital, time, and money from the finite "bank" of investable resources available to put in place.
And revenue only really happens when the buyer finishes up the settlement process on closing day. So, the economics of supply, particularly as they apply to new-home supply, make the game of investment and prediction that much more difficult. You used to be able to look at a formula for job formation, wage growth, and household formation and fairly reliably forecast what new-home demand would be in a market, with a slight lag built into the timing of the growth. That's not a given, except in rare hyperactive markets that we see illustrated in the "bidding wars" story.
So, the onus on builders is to achieve money-making margins on every house as if it were its own GDP, its own economic cosmos, within a swirl of offsetting headwinds and tailwinds.
I've heard it said, "work in process is what work in process is." Try telling a project supervisor that. How susceptible is your schedule to vagaries of weather, trade capacity constraint, inspection and permit delays, a job site "event" or surprise?
When builders sell homes to higher end buyers, there's WIP wiggle room on both the cost side and the time side. A family that needs to get settled before the start of a school year, or one whose financing could be at risk were there to be undue delays in the completion are another story altogether when it comes to WIP.
Fact is, more builders have more communities now that are farther out on the proverbial limb when it comes to the day-to-day battles that supervisors fight to stay on top of their WIP, especially as lower-priced, lower margin offerings are added generously to the mix in the coming months.
Less wiggle room makes for greater valor on the WIP front. Our hats off to the supes! Let the headlines make noise about months' supply and the usual explanations for whys and wherefores. The supes are why builders may have some wiggle room with their margins, even with a discount or free upgrade thrown in to keep pace where it needs to be.