IT'S OFFICIAL. FROM COAST TO COAST, BUILDERS report an almost unprecedented barrage of material shortages and price increases. The good news is systems are in place to help reduce margin erosion and building schedule interruption.

“I have never experienced it like it is right now,” says Tony Fitzgerald, vice president of purchasing for Morrison Homes' Tampa division. “Every time you turn around there is another shortage or an allotment. For the last three or four months, there has been one right after another.”

Joe Haprin, corporate administrative and purchasing manager with Drees Homes' Midwest region, agrees. “We did learn some lessons on shortages in the past. But in the past, it was one material shortage at a time. It has been a while since all the shortages lined up at once,” says Haprin, who has been in the housing industry for 28 years.

Steel, copper, panelized systems, lumber, gypsum board, and OSB board are among the items that have been impacted. China's construction boom, a hot U.S. housing market, international trading squabbles, record-level gas prices, and other issues all contribute to the challenging situation.

Michael Carliner, NAHB economist, projects that the price of a 2,100-square-foot home is $5,000 to $6,000 higher now than at this time last year.

MATERIAL PRICING In times like these, big builders have big challenges. How to obtain material, how to secure prices, and when to pass cost increases on to buyers without driving away sales is the balancing act that must be performed on a regular basis. Big builders are responding with heightened focus on schedules, increased meeting time with suppliers and accounting departments, dependency on long-term partners, new contractual arrangements with contractors, and a variety of other business strategies.

Concrete Schedules Mike Neace, vice president of purchasing for Morrison Homes' Orlando division, says, “We evaluate the concrete schedule weekly because we are on weekly allocations.” Neace says this is a challenge as the division is growing from 621 homes in 2003 to 850 homes this year.

“In Orlando, supplies are so short that no one is pouring on Friday,” Neace says. “If we have concrete available on Thursday and have to choose between pouring footers or lintels, we pour lintels so framers can have work through the weekend. We only pour footers on Monday or Tuesday when we know more concrete will be available the next day or two for other purposes. If there is a closing coming up, we will make sure to pour the driveway.”

“There is a panic going on and everyone is ordering concrete even if they are not sure if they need it,” Morrison's Fitzgerald says. “Some mornings, concrete companies have customers who don't need the material they pre-ordered for that day. If you call dispatchers at six in the morning and see if there is any concrete available, you will often find that it is there.”

Home-Price Adjustments Despite the material price increases, builders are able to maintain profit levels. “We haven't experienced margin erosion because we have been staying on top of price increases with some degree of accuracy and have adjusted sales prices two months in advance,” says Neace, whose division is experiencing more than 25 percent growth this year.

SUPPLY STRAIN: Regional shortages of building materials due to demand pushed up home prices $5,000 or more over the past year. At Morrison Homes' Houston division, Dave Patton, vice president of purchasing, says, “When price spikes are common, we make sure we are covered in our home prices, but we make sure we are not too far ahead of the curve when raising prices or that will shut the door on us.”

Dave Myllymaki, purchasing manager for New Traditions, in Vancouver Wash., says, “In a perfect world, you can say this material increased this much, so the home is going to increase this much, but to keep sales velocity you have to pay attention to what the market will bear.” New Traditions closed on more than 300 homes in 2003 and should close on 350 homes in 2004.

Long-Term Relief Stephen Drake, director of purchasing for The Villages of Lake Sumter, Fla., is seeing the importance of maintaining long-term relationships with suppliers. The Villages will build between 4,300 and 4,500 homes in 2004—1,000 more than last year—at its single location in Central Florida.

“When there is only a given amount of material, suppliers are willing to deliver based on long-term relationships and payment history,” Drake says. “Builders who change suppliers regularly to obtain a better spot price have not maintained proper lines of communications, and that can affect their business when supplies are short.”

“The long-term relationships we have with our vendors has gotten us a lot of protection against shortages over the years,” says Morrison's Patton. “They are almost a part of our company and are in our office at least once a week informing us of potential issues and helping to plan solutions.” Part of Patton's solution has been to negotiate a 45-day written notice of price increases so there is time to make plans with suppliers.

Suppliers seek out good builders in difficult times, according to Drees Homes' Haprin. “We have a great reputation for paying on time and in quick, two-week cycles,” he says.

Dan Magruder is vice president and general manager of Ro-Mac Lumber and Supply, which has provided The Villages with a majority of its frame packs since 1989. “When OSB got short, we were able to keep The Villages supplied despite their rapid growth. We went to lumberyards and bought from them and negotiated contracts tied to Random Lengths directly with mills,” Magruder says. “Because we had commitment from The Villages, we made commitments to our suppliers. It came close a couple of times. If we didn't have contracts with the mills, we would have missed some deliveries.”

Magruder concurs that good business practices help in the long run. “During these tight times I have heard suppliers say, ‘We don't want the business of builders who are slow to pay or not ready when we come,' ” says Magruder, who is on the boards of the Florida Building Materials Association and the Lake County Builders Association.

As a champion of open communication in the building industry, Magruder publishes his material prices as a gauge for builders. He releases a general materials cost list and provides frame pack prices for specific models to select builders, such as The Villages, which uses eight different general contractors.

“We established a tracking system in 1999 for set packages and established a base price, which is updated each month so a builder can know the percentage of change for each house,” Magruder says. “In 1999, the market was high, so relative prices were down until last year when the numbers went over 1999 levels.”

Drake appreciates the price rating service, despite the fact that it shows high prices this year. “There was a 20 percent frame pack increase from the beginning of March through the end of May,” Drake says.

In Florida, Magruder says the introduction of Borate-treated lumber as termite-resistant furring strips has prepared the local home building market for a potential major material change. And concrete block is used for exterior wall construction, but now that there is ready supply of Borate-treated lumber available for stud wall construction, Magruder says he believes a material shift is pending. “I am starting to see some signs that framers are willing to switch from block walls and metal studs to Borate-treated wood walls to save on costs and not be impacted by material shortages,” he says.

Design Solutions To help relieve some pressure of material shortages and price increases, big builders are redesigning parts of their homes to save on materials. “We have eliminated a hip roof in one model and replaced it with a gable roof to eliminate wasted wafer board,” says Rick Salisbury, owner of Salisbury Homes in Springville, Utah. Salisbury expects to build 650 homes in 2004.

New Traditions' Myllymaki indicates his company has implemented a more dramatic material change. “Our building sciences team looks for ways to technically improve the houses while also finding cost efficiencies,” he says. “This year we switched from copper plumping as the standard to Flowgaurd CPVC pipe in order to reduce plumbing price increases.” But this switch doesn't totally relieve material price pressures or availability issues, according to Myllymaki. “Because CPVC is an oil-based product, now we have to watch oil prices and their impact on CPVC,” he says.

Morrison Homes' Patton notes that his Houston division has also replaced copper plumbing components this year. “We went to a PEX system by Zurn that has one home run for hot and cold water to each fixture from what looks like an electrical panel in the utility room. There are no joints behind the wall, and we thought it would help reduce warranty problems,” Patton says. Because of the increased length of piping needed for home runs to each fixture, there was no huge savings, according to Patton. “But we will have no increases in our plumbing package this year, and we think it is a win-win solution,” he says.

Patton is also investigating the use of pre-built trusses, but not for the reduced labor that most builders look for from factory-built components. “We haven't made any design changes yet, but we are exploring pre-built roof trusses to eliminate larger dimensional lumber,” Patton says. “We typically use 2x8s and 2x10s in common roof construction, but the lumber dimension goes down to 2x4s and 2x6s when moving to pre-engineered trusses.”

Fitzgerald points out that being a large builder in his region helps assure resources are available. “Don't have all eggs in one basket, but have enough in each basket to get top priority,” he says, on the strength of Morrison building 546 homes in Tampa during 2003 and planning to build 732 this year.

That's good advice whether there are material shortages or not.

Learn more about markets featured in this article: Orlando, FL.