Pressure. The consensus take-away from 2013's home building trajectory is that home buyer demand was rumbling along down the track toward a huge gain, but then builders got too greedy on price, Ben Bernanke started talking about tapering, and suddenly all that momentum ground down to a near-standstill.
Now, freshly spruced by recent headline mojo from lagging price and production benchmarks and an irrepressible dose of "hope-trade" builder annual fairy dust, expectations are for Spring Selling Season demand to emerge on schedule and swell through and beyond the mid-point of 2014.
The issue, though--and you know it only too well--is will you, might you, can you, make money? Orders and volume are the industry's biggest question mark right now, but as soon as orders start to trickle, stream, or flood in, the question then immediately tips into profitability.
So, it's timely that SAI Consulting's Fletcher Groves revive his perennial Cost-Volume-Profit challenge around the notion of how builders should look at costs from an accounting and operational perspective.
We can see from the accompanying data visualization of the National Association of Home Builders Construction Cost Surveys 1995-2013 that, as the total price of the median single-family home leapfrogged from 2011 lows upwards toward 2007 highs, construction costs have been heading up, while financing and overhead costs have been shrinking.
Here's comment from NAHB economist Heather Taylor on the trend:
As shown in the table, profits hit an all time low of 6.8 percent in 2011, but have rebounded to 9.3 percent in 2013. During the downturn many builders had to tighten their budgets. Although homes are beginning to sell, and prices are beginning to rise, builders remain very cautious. This could be why overhead and general expenses, which were 5.4 percent and 5.2 percent of the sales price in 2009 and 2011 respectively, hit an all time low of 4.3 percent in 2013.
In this data, we see that home building enterprises, large and small, are not immune to the dynamics of manufacturing and services organizations writ large. All face an identical challenge in both understanding costs as direct or indirect measures in their balance sheets, and leveraging that understanding as operational indicators of where and how to direct further resource investment.
Simply, it's a question of what you control and what you don't, and how that flows into operational accountability vs. externalities that are beyond your operational impact.
Groves argues that you've got to be clear on how costs such as indirect construction costs, selling expenses, and finance costs--costs that companies tend to account for as part of operating expense--each a non-variable component that should be leveraged against scale and velocity.
At issue in Groves' challenge are basic questions about how costs behave in relation to revenue.
If you resolve the accounting complexity here, you reach an even tougher challenge, which is the accountability issue.
* Labor, lots, and materials costs are all going to increase
* finance costs, too, are likely to increase
* house prices, given both credit constraints and the limits of the all-cash buyer pool, will likely flatten
So, accountability changes, which boils down to management needing to do more with less, extracting greater value from fixed (non-variable) costs, in pursuit of greater volume amid margin compression.
Sounds mostly like you've got to be a better company today to make a go of it than you were last year or the year before that. Are you ready for the squeeze on your margins?