While local and regional homebuilders share similar outlooks in a lot of ways, local homebuilders are faced with different challenges and finding unique solutions
by Glenn Renner
Former Speaker of the House, Tip O’Neill, famously said, “All politics is local.” The same can be said for homebuilding. Yet most intelligence, predictions and opinions are gathered from the Top 100 builders, even though local production builders are actually building most of the homes.
Our HomeSphere team, along with global financial services firm BTIG, agrees with O’Neill. Monthly, we conduct the only U.S. survey that seeks the opinion of local builders. With names like Ash Creek Homes and DiGiovanni Homes, these builders generally build 50-100 homes per year across a broad spectrum of price points in urban and suburban markets. We survey them because they are the community we serve and we are their advocates. They also represent a strong buying and behavioral segment of the market, with a voice that the industry needs to hear.
How are local production builders feeling about the market?
When it comes to the broad outlook, middle-market builders align with the Top 100. The same positive dynamics underlying the market are keeping local builders optimistic, and a strong spring selling season has underscored their optimism. First-quarter sales and traffic have beaten expectations, and demand remains high as we move into summer.
As a result of high demand, local builders are also raising prices. In fact, zero percent of our survey respondents reported taking a price cut in any monthly survey this year, while 79 percent of builders in our most recent survey reported raising some or all of their pricing.
The year’s early interest rate hike did not hurt sales for local builders either. The top of the market was concerned about impact from rate hikes, but our builders agree that rates are not having an overall negative effect. In fact, in our February survey, a majority (51 percent) of respondents thought higher rates pushed buyers “off the fence” to beat further rate hikes.
Where local builders do feel different pressures than their multistate contemporaries is on the cost side. Not a single respondent to our survey reported decreasing land, labor, or materials costs. A whopping 81 percent of survey respondents reported materials pricing increases, and a majority of local builders note that the persistent labor shortage is impacting costs. The top of the market is experiencing many of the same problems, but the two segments must come to a solution differently.
Let’s look at materials pricing, which our VP of Sales, Kimberly Roos, reports as one of the largest negatives impacting our customers’ business today. Constantly in the field with our regional market specialists and builders, Kimberly has told me that, “Builders don’t feel in control of material costs right now.” It’s no wonder. Some of our builders are experiencing one to two price increases per month, particularly on commodities like lumber. As a result, it is next to impossible to estimate build-out costs over an average six to nine month production schedule, which obviously affects pricing.
Where the larger builders can rely on buying power to stabilize increases, middle-market builders are looking to rebate and incentive programs to help manage manufactured product costs. By using front-end and back-end savings to reduce the cost of the products installed in homes, builders are better able to protect their profit margins while they try to grab the commodity price tiger by its tail.
Labor is a problem for the market in its entirety, with different solutions for the varying-size builders. We all know that local builders have tighter margins and less work for subcontractors who look to keep full workloads which the top 100 can provide easily.
This has led to some creative solutions in local markets. In some cases, builders com- mit to using the same subcontractor across multiple years and projects to lock in loyalty. But this approach can have a negative effect, too, as it locks in the products builders can use within the home, thereby limiting their ability to shop new brands or change their product mix. Smart builders are locking in subcontractors by also becoming their partners in growth. A number of our builders partner their subcontractors with manufacturers to deliver training on products that are new to the market (such as smart home systems) or are new to the contractor.
Ninety-nine problems? Perhaps, but demand “ain’t” one. A recent Gallup poll said two-thirds of people believe it’s a good time to buy a home, and the National Association of Home Builders/Wells Fargo Housing Market Index reports builder sentiment remains high. A similar optimism exists among our community of builders and building product manufacturers. With builders armed with better insight into the market and creative solutions, the summer of 2018 could shape up to be a banner season nationally, regionally, and locally.
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 email@example.com