Even as demand for new homes grew and sales prices began to climb in 2012, so did the specter of potential margin squeeze in 2013.
Scarcity of good land and lots has already begun to drive prices up. Finding skilled laborers, too, is becoming an issue in some recovering markets, driving up costs through higher wages and slower schedules. And some materials costs are rising as suppliers work to reconstruct disassembled supply lines and delay reopening plants shuttered during the dark years.
“There are potentially fairly significant headwinds” for builders,” says Jody Kahn, vice president John Burns Real Estate Consulting. “It’s always messy coming off the bottom of the market.”
So far, builders have been able to offset increasing costs with home price increases, says analyst Stephen East, senior managing director at ISI Group. But that might prove difficult in 2013 if the market begins to gain even more momentum.
The potential shortage of good land available for new homes when the market returns is something home builders have been talking about throughout the recession as many land developers went out of business. Builders with cash, mostly the large public builders, took advantage of the hard times to buy land low.
However, by the end of 2012, with a fledgling housing recovery under way, the cost of land in the best locations was rising.
In the Orlando, Fla., area, for instance, Mike Moser, co-CEO of Starwood Land Ventures, a private equity-backed developer, says large public builders were spending as much as $60,000 to $70,000 for finished lots in A locations at the end of 2012.
And they weren’t shying away from undeveloped land in good locations either. In a suburban area not far from Disney World, public builders were spending $30,000 to $40,000 a lot for raw and unentitled land, Moser says.
East predicts that land prices for finished lots will accelerate during the first part of 2013, but ease off by the end of the year when more finished lots are ready.
Labor cost increases is another issue that is likely to hit builders’ bottom lines during the first part of 2013 as fees rise and delays increase because of lack of labor. By the end of 2012, builders were already reporting shortages in some markets.
“Markets like Phoenix and parts of Florida and Texas have labor shortages in some trades, while other markets like the Inland Empire [in California], Dallas, and Charlotte have labor pools that have been able to absorb the increase in activity,” says Jonathan M. Jaffe, Lennar’s COO, during its third quarter conference call.
Other builders tell stories of workers who found other work during the recession and are reluctant to abandon their new jobs for what they consider less certain employment. Likewise, some subcontractors are loathe to hire back workers for fear that the recovery might falter and they will have to lay them off again.
East suspects the labor problem will persist during the spring selling season but ease in most markets by the end of 2013 if subcontractors begin to have faith that the recovery is going to continue and start rehiring. Still, labor prices are likely to climb because of scarcity.
By the end of 2013 prices for some materials had also begun to rise. Lennar reports a $2,000 to $3,000 per home increase at the end of 2012. It blamed increases in lumber, drywall, and concrete, as well as labor costs for the increases.
Toll Brothers reports lumber costs for its high-end homes were up by $11,000 per home by the end of 2012 and overall costs were up $29,000.
Analyst East suggests costs of materials might be a problem that continues for builders throughout 2013.
“There is continual pressure there,” East says. ”The building products guys haven’t made any money either for years.” Plus many lumber mills and plants that were shuttered will take money and time to start back up again, something materials suppliers may be reluctant to do unless they are confident the market will continue to improve.
“It’s not like it’s a plant sitting there ready to go,” says Lisa Jackson, a vice president of John Burns Real Estate Consulting. “Some of those facilities are literally gone.”