The real estate market is experiencing a boom nationwide with inventory in the 50 largest U.S. metro areas down by 51% and homes spending an average of 20 fewer days on the market in April 2021 over April 2020, according to Realtor.com®. In nearly every market I visit, I hear stories about how low – or even non-existent – the resale market is, so new construction is often the only game in town for buyers that need to make a life change. Residential construction has been under-supplied for years, and it will take years for us to build enough inventory to meet natural demand.
While there is huge opportunity right now, lead times for nearly all building components are on extended time frames. Most of the industry is adapting by shortening buyer change periods and placing orders well in advance, but you can ease the strain further with excellent communication and creative thinking.
Keep in regular communication with trade partners and buyers.
You can’t sit back and wait to hear from your trade partners during a shortage. Stay in constant communication, so they can keep you notified of current timelines and so you can notify them of your needs. Share your regional starts schedules and preliminary purchase orders at the time of contract to give as much time as possible. By implementing these practices proactively, you can limit exposure to uncertainty around lumber and appliances.
Buyers are fully informed on the frenzy that is occurring in new construction and understand the implication. Be candid and accurate in the delivery dates you quote, and buyers will understand. Many builders are offering creative solutions, too. For example, some builders are installing temporary loaner appliances to avoid delaying closings.
“Be candid and accurate in the delivery dates you quote, and buyers will understand.”
Join a network.
Builders with significant buying power with manufacturers and trade partners are receiving priority treatment. If you are a smaller builder, seek out opportunities that increase your buying power by joining a network of other builders working in similar spaces. Most markets have established buying groups that charge an initiation fee and then retain a portion of manufacturer rebates to generate revenue for the administrator of the group. Franchising is also a great opportunity to increase buying power, as franchises are able to consolidate the buying power of all the franchisees to negotiate preferred supplier pricing and rebate programs that go directly to the owners of the franchise.
Standardize your product line.
Builders that have standardized floor plans and specifications across their plan collection are more insulated from the materials issues. Settle on a handful of window models across your entire portfolio. Work with your engineer to provide consistency in your construction drawings so that you are ordering only the most common types of engineered wood. Simplify your floor plans so that framers can work through your jobs quickly, instead of designing odd corners or exterior details. Too often, builders don’t view their job sites as a manufacturing facility and don’t appreciate the need for trade partners to see consistency from house to house.
Raise prices cautiously.
With interest rates persisting at such low levels, buyers are able to absorb higher prices to cover the cost increases you are facing. For example, we have raised prices several times in the last six months while still seeing record sales. Each of these increases, though, was moderate and just covered our cost increases. Builders should not think the price ceiling is unlimited and, instead, work on modest increases to maintain desired margins.
While these supply chain issues and inflation pressures are certainly affecting smaller builders more than larger builders, all builders are dealing with it to some degree. These concerns will likely last into 2022, so there is time to make the necessary adjustments. With demand being so strong – and expected to continue – the need to build collective buying power and standardize the offering is a long-term discipline that will reap benefit for the long-term.
This article originally published on bdmag.com.