A housing recovery--even a tepid one that, throughout, failed to engage, activate, and gain momentum from marginally qualifiable aspiring home buyers--is a terrible thing to waste.
Failure itself, in the face of real consequence and an increasingly palpable sense of the real-life pain that comes with it, has lost some of its devil-may-care luster as a linchpin to a culture of innovation these days. Fortunately, if learning comes out of it, failure is still okay.
Which brings us to now. You're hearing it. We're hearing it. And we're not talking about the latest unzipping of the polar vortex. Rather, a chill sweeping across more and more markets, burrowing into submarkets we really care about. Note to Fed chairman Jerome Powell, with all respect, we "don't need a weatherman to know which way the wind blows."
On the street, the talk is of discounts, incentives, free options and upgrades, downpayment buy-downs, anything and everything to keep pace going. All the tricks aimed at wresting growth, absorptions, inventory turns, lot carrying costs, etc., out of these recent and coming months of uncertainty. This, rather than waiting out people's digestion of a higher mortgage interest rate era that--while thus far relatively benign--succeeded in sucking the oxygen out of so many markets by testing monthly payments' outer limits.
And on Wall Street, that means, as Wells Fargo home builder and building materials analyst Stephen East expressed it in his take on Lennar's ever-clearer pivot:
"Volumes will be the primary focus through good times and bad, resulting in better free cash flow, ROE and Operating Margins. Absent is Gross Margin, and purposely so, as management believes it behooves them to make that metric secondary."
Unpack that, and what do you get?
- Hyper focus on operational outflow and income.
- Opportunity-areas for greater efficiency
In an environment where Plan A amounts to achieving even modest volume growth by ratcheting pricing down to more modest per-unit margins, that translates--necessarily and urgently--into measurably increasing productivity: More with less.
Inefficiencies, whether they take the form of friction in back-office processing, transactions, and information systems, ill-timed job site construction management, on-site waste, blunders and omissions that result in permit or inspection delays, have gotten and will continue to get the third degree.
Have a look at this parable from a trusted advisor to many builders, Noelle Tarabulski, whose focus here is on building an expense-saving solution into a commonplace ankle-biter type area of inefficiency: hauling job site waste. Noelle writes:
By my count, there are over 150 ways to improve a home builder’s profit. This is just one. Reducing trash collection costs by finding a use for it first. Builds Profits.
Yes, your prospective home buyers pay 25 cents on the dollar to Uncle Sam and his countless nieces and nephews in local, county, and state jurisdictional fees, taxes, premiums, associated with regulation.
That may be a fact, but that's not something you and your team can attack as an "opportunity area" in your business, to lower prices, lower margins, raise volume, but not do it in such a way as to expose your business to failure. What you can, should, must address is the 25 cents on the dollar people pay for your homes that do not specifically and directly and tangibly and dramatically produce value to them--a quarter on the dollar that gets lost in supply chains, workflows, processing, and other forms of strategic and tactical waste.
Tarabulski counts 150 ways to improve.
But as Fletcher Groves, another trusted advisor to builders, points out starkly, self-improvement can only happen with a candid, unflinching starting-place audit assessing the current situation and practices.
Here, from Journal of Light Construction contributor, licensed builder, and author Dave Gerstel, is, very likely, one of those areas Noelle and Fletcher would perhaps agree is a common opportunity area for improvement, providing there's that candid audit of current practices: estimating:
The “trick”—or the skill, actually—to nailing your numbers comes down to abiding by four fundamental rules of estimating:
- Don’t miss any work called for or implied in the plans and specs.
- Don’t miss any component of labor costs, from wages all the way through minor insurance burdens.
- Don’t miss any of the costs for materials to be used by your crew all the way through consumables, like dry line and pencils, and delivery charges.
- Make sure that none of the work you are subbing out falls between trade partners and is, thereby, left out of your estimate.
A category of items that are especially easy to miss, but that must not be neglected, is best described as “General Requirements.” GRs are a big cost on virtually every project, yet they are often underestimated or outright overlooked because they are merely implied in the plans and not explicitly called out. Even detailed specifications may barely mention them. For example, daily cleanup is a significant GR. Likewise, a portable toilet, temporary power, and erosion control devices are often required but are called out only in comprehensive specs.
Little things add up. They add up really fast when you're pressing the accelerator to double-down on volume with a plain to gain narrower profits back on that pace and efficiency.
Are we now fully back in deja vu territory? What did we learn from the middle of the last housing boom? What did we learn from the cliff-dive that followed?
Importantly, what have we learned from this past 8 years' recovery about who we are, what we want to be, and how well that matches up to what's in store?
Now, folks turn to page 284 of your copies of George Santayana's "Life of Reason, Reason in Common Sense," Scribner’s, 1905, and let's discuss this quotation:
“Those who cannot remember the past are condemned to repeat it”