In a Year of Uncertainty, Look To Efficiencies To Manage Margins

As Q1 of 2019 draws to a close, trends are looking good – though builders are advised to manage margins carefully


Hard as it is to believe, we have wrapped up 2019’s first quarter and are heading into the homebuilding and homebuying home stretch. Depending on your perspective, Q1 was either partly cloudy or partly sunny. According to our monthly survey of the nearly 2,500 local homebuilders that are members of HomeSphere’s digital marketplace community, sales were a bright spot.

The survey is conducted in partnership with investment bank BTIG and represents opinions of builders that build an average of 100 homes per year and are primarily locally or regionally based. Though reported sales are not as robust as early 2018, the comp versus last year is less negative than it was last quarter. Traffic is reasonably healthy, and the market is rising out of the trough it hit in Q4 2018.

However, to remain “on the sunny side,” builders must look at ways to manage the clouds – namely margins. Even last year’s highly positive sales were impacted by rising costs, particularly for building materials, which builders consistently reported as negatively impacting business. Building costs rose to staggering heights last May, when 92 percent of our builders reported an increase month over month, but they have come down of late. Only 41 percent of said materials’ costs had increased in our last survey (February 2019) as compared to the previous month, and 10 percent of builders actually reported a decrease.

Labor is also impacting costs and margins. Last year, it was a rare month when even a small percentage of builders reported a decrease. In fact, most reported month-to-month increases throughout 2018. The labor cost trend might be changing for the better, however — only 39 percent of builders reported an increase in our most recent survey, compared to 43 percent the previous month. This is a significant improvement over last year, when the percentage of builders reporting labor cost increases ran in the mid-to-high sixties.

Despite this positive turn, builders this year are unable to manage higher material costs with higher home pricing. In fact, only one in 10 builders raised base prices in February. This percentage is the smallest in survey history, and it is happening during a seasonal period in which builders typically raise prices. The reverse was true just six months ago, with 61 percent of builders reporting an increase in September 2018. Compare this to Q1 2018, when the market was red-hot and the economy strong. In January 2018, 100 percent of our builders raised base pricing on their homes. Pricing stabilized in the following months, but a shocking zero percent of survey respondents lowered home pricing before September 2018.

Today, Carl Reichardt, Jr., BTIG’s veteran industry analyst, references “increasing price resistance” and believes that “raising base pricing is no longer the answer to the margin problem.” Instead, we believe the future belongs to those builders that can find efficiencies in every area of their business.

Sales are slowly rebounding from late 2018, and sunny spots remain. Builders with entry-level exposure continue to fare well. The economy remains strong, and the housing supply relatively low. In our view, builders have a choice in the way they manage the slowdown. A builder can choose to lower prices, offer incentives, get lean or wait it out with the faith that the economy will remain healthy. Perhaps the answer is all of the above. In this last month, five percent of our respondents opted to lower some or all prices, 39 percent increased incentives and a little more than 50 percent stayed the course.

What we did not ask was how builders are managing their materials costs — primarily because builders traditionally have had little or no control over these costs. Our team is working to change this situation by changing the way the industry procures products and using data collection to open the flow of information. As a natural extension of our rebate-processing platform, we are digitizing the whole U.S. home inventory, home by home, product by product, from foundation to finish, inside and out, and throughout the home’s lifecycle. A centralized source for home product data will deliver new insights that allow builders, manufacturers and providers in adjacent industries to manage costs using data to drive decisions — and at the same time, drive innovation.

With that approach, we hope to support forward progress for our homebuilders in the year ahead. Profit margins will continue to get squeezed, but through innovation and insight, we believe the industry’s outlook will remain sunny.

About the survey

Each month, BTIG conducts an electronic survey of approximately 75-100 small to midsized builders on HomeSphere’s platform. Builders answer questions about sales, traffic and cost trends on a year-over-year and month-over-month basis. Disclaimer:

Glenn Renner is chief executive officer of HomeSphere, the country’s largest digital marketplace connecting major building product manufacturers and local builders. He can be reached at

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