Technology

Strategy, Tactics, Mechanics Meld In A Build-Cycle, Price, Pace Race

A rapidly evolving buyers' market puts homebuilders' schedules, costs, and build-cycle controls to the test. Collaboration, data-sharing, and constantly refreshed insights become non-negotiable tools.

Together with

Technology

Strategy, Tactics, Mechanics Meld In A Build-Cycle, Price, Pace Race

A rapidly evolving buyers' market puts homebuilders' schedules, costs, and build-cycle controls to the test. Collaboration, data-sharing, and constantly refreshed insights become non-negotiable tools.

Together with
June 22nd, 2022
Strategy, Tactics, Mechanics Meld In A Build-Cycle, Price, Pace Race
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And just like that, there's roughly just 150 or so weekday work days left on the 2022 calendar.

Homebuilders and their partners have their work cut out for them in the back half of the year, as they toil between the rock of upheaval on the price front and the hard place of construction disruptions due to labor and supply chain constraint.

Two glaring rapidly evolving new developments jumped out of Lennar executives' commentary on the company's second quarter 2022 earnings release with investment analysts yesterday.

  • One is that construction conditions – while by no means "normalized" – have improved to the realm of manageability; it's now up to builder/operators themselves to restore build-cycles to higher levels of predictability.
  • The other is that all the switches and levers builders use to keep order pace where it needs to be – rate buy-downs, incentives, even price reductions – have kicked into use to varying degrees in more than half of housing's most-active metro markets.

Lennar executive comments – certainly not speaking for every homebuilder in every market and submarket, but rather a broad, rough proxy for peers both large and small – contextualize the big lift homebuilders in the U.S. face ahead around work and investment put into place during the housing cycle's last inning surge, and the need to navigate their own "soft landing" for all of that work-in-process as conditions reverse toward a decline. And fast.

Time now as always is either your enemy or your friend. A buckling and heaving “fire and ice” economy means time is of the essence – eroding payment power, shocking capability, and making it cost more everytime you turn around. Clearly, the more days that squeeze themselves into the start-to-completion construction cycle, the more that can and does go wrong.

Unpredictability goes with the turf – but as with each of the housing economy’s booms and busts, this one is no different in that some builders figure out ways to shield themselves from the harm many of their peers experience. That means transforming as much unpredictability to reliability as is humanly possible. It won't be easy.

Robert Dietz, chief economist for the National Association of Home Builders, puts the big lift this way in an analysis of the Census's latest housing starts and permits release:

As an indicator of the economic impact of housing and as a result of accelerating permits and starts in recent quarters, there are now 822,000 single-family homes under construction. This is 24% higher than a year ago. There are currently 843,000 apartments under construction, up 25% from a year ago. Total housing units now under construction (single-family and multifamily combined) is 24% higher than a year ago. The number of units under construction is rising on both the total volume of construction, as well as longer construction times. However, it appears the number of single-family units in the construction pipeline is now peaking for this business  cycle.”

In big broad strokes, finishing all the homes that are under construction in 2022 would mean picking up the pace of completions to 5,500 homes a day. Bill McBride, economics and housing analyst at Calculated Risk, doubts that's likely.

Image courtesy of Calculated Risk
Supply constraints have lengthened the time from start to completion. We can see the impact of supply constraints by looking at the gap between single family starts and completions. It usually only takes about 6 months between starting a single-family home and completion, but it has taken longer during the pandemic.

Net, net in a year that builders mostly modeled in 2021 as one with characteristics a lot like last year – a heavy battle on the supply side of the operational equation with a lot of forgiveness, i.e. ability to pass on price increases on the demand side – they're now facing strong headwinds on the demand flank as well.

Those who succeed, survive, find opportunity, and position themselves to grow will need to:

  • Complete and settle on their current order backlogs – with cancellations and casualties due to the erosion effect of rising interest rates and prices
  • Find a new "floor" – product, price, location, value – to build on for new orders in a more adverse operating environment.
  • Subtract the cost of time and the domino-effects of mistakes from the build-cycle.

The good news, as we heard in Lennar executive commentary from co-ceo Jon Jaffe, is that a semblance of sanity is within grasp when it comes to builders managing an actual supply chain, rather than a hodge-podge of reactive audibles to get houses built.

Our second quarter started presenting some favorable news. There were still intermittent disruptions and an increase in construction costs, but for the first time since the disruptions began, we saw a flattening in cycle time. Over the past four months, cycle time has expanded by only five days, which we believe signals at peak. Additionally, about 25% of our markets experienced cycle time reductions in the second quarter compared to the first quarter. There are still challenges that occur, but we are managing them effectively evidence not only by this flattening of cycle time, but also by being above the high end of our guidance for second quarter closings.
Our direct construction costs in the second quarter were up 1.6% sequentially and 20% year-over-year, both lower than the comparable increases for the same period in the first quarter and fourth quarter of 2021. Rise in labor cost accounted for all of the increase in the second quarter. Material costs were lower due to the lower priced lumber from starts in the second half of last year. We expect costs will rise again in the back half of 2022 as increases in lumber that's back in Q1 will flow through those closings. The current drop in lumber prices that we're experiencing would start near the end of our second quarter will lower the cost of our starts in the second half of this year and related deliveries in the first half of 2023.

What comes through clearest in Jaffe's take on management within dynamic conditions is that each moving part, each change to the good or the bad, each nuance in the price and time spectrum requires nimble, opportunistic response to keep operating margins optimized as the landscape shifts.

The Builder's Daily Dream Teamer and author of How Much Is The Milk Ken Pinto notes that the ability to proactively respond to known and unknown, highly fluid conditions with labor and materials capability is an exception in the homebuilding community, not the rule. Flexibility, agency, and leverage like that of Lennar's comes through a blend of precisely mapped real-time data tools and the ability to engage supplier partners in a trusted community of practice – a hard connection line into their partners' business operations. Pinto tells us:

Not all homebuilders are having trouble acquiring building materials. These same builders have not experienced an increase in their construction cycle time. Not because they don’t have struggles, but because they have data to enable better buying decisions. The difference… supply chain visibility and connectedness.
Best practices of homebuilders whose construction cycle times that have not increased during the past 2 years include dynamic links with their suppliers that enables a 'next level' degree of collaboration.
The homebuilder commits to buy materials from a dealer—no shopping around. The dealer then provides a dynamic link into their inventory system for full visibility, including those products that have been reserved for this homebuilder. As inventories change throughout the day, the homebuilder supply chain managers can see it.
The homebuilder enables capability for the dealer to see SKUs and Date Needed data by creating purchase orders with SKUs, quantities, and pricing. The purchase orders are connected to the construction schedule and as the schedule changes, the dealer can see it. Ideally, the homebuilder’s data should be electronically absorbed by the dealer’s system, no hand entries. In the case, the homebuilder can collaborate with the dealer each week on making material purchases. They do it together."

This type of epic-level collaboration – enabled by bill of materials and SKU level data tools – has been an underappreciated advance among builders and their partners, accelerated during the duress of COVID and the massive supply chain breakage that occurred in the pandemic's immediate wake.

A quickly spooling force-factor – the loss of price elasticity spreading throughout U.S. markets, and the growing spectre of price reductions as a way to sustain order pace during some indefinite stretch ahead – makes that epic data-enabled collaboration between builders and their trade partners even more compelling.

As Lennar co-CEO Rick Beckwitt noted, the company has seen varying levels of impact to buyer demand, ranging from flat-to-stable, to middling, to deteriorating, and has reverted across all of its operating regions to a "mark to market" dynamic discipline to keep its operations at full-steam:

The markets remain very fluid and we are making strategic decisions and adjustments every day. As we've said in the past, we're going to keep our homebuilding machine dwelling, maintain our start pace and price our homes to market."

The operative term here – and one that should stand out – is "making strategic decisions and adjustments every day."

This assumes constantly refreshed flow and visibility and interelational insight into cost, price, time-impact, and ultimate selling price on an end-to-end basis.

This is where holistic construction, partner, and sales closing management platform solutions figure so importantly into "making strategic decisions and adjustments every day."

Our customers at Constellation have robust technology platforms available to them to help them more efficiently run their businesses, says Bob Swainhart, General Manager, Enterprise Solutions as Constellation Homebuilder Systems. "During these uncertain times, it is more important than ever to rely on the data insights and processes that these solutions enable. Builders who are minimally impacted by the labor and material availability and scheduling bottlenecks that have recently plagued the industry are the builders that are relentless in their pursuit of efficiency.
Imagine a builder learning that the lead time on drywall changes from a week to a month. If you don’t capture that change in your schedules right now, you will lose 3 weeks on every start going forward.  Make the change once in your system and the impact of that change is immediately minimized.  There is no time to wait…
I am constantly advocating for “effective system use” by our builders.  The playbook is simple in theory, but requires commitment in practice:
• Define expected end-user behavior that provides leadership with the data they need to run the business day-to-day
• Leverage your vendor relationships to ensure you are receiving the information you need from them to accurately forecast/re-forecast your completions.
• When you learn of material shortages, changes to lead times and product substitution, capture the changes immediately – if you have a product substitution, cancel the old PO and issue the new, updated PO ASAP. And don’t forget to change the material takeoff permanently so every new home has the updated product information.
• Meanwhile, you should be consistently scouring your data for any additional insights that may emerge.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

ABOUT

Constellation provides fully-integrated or standalone software solutions expertly engineered to manage the complete ecosystem of a homebuilder’s business functions and growth.

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John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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