The article I published in April, Record CM Building Industry Net Profits are Coming to an End Sooner Than Most Believe, predicted that the construction industry would start seeing negative market changes around August of this year. Wow, was I right about calling that one? The continued expansion of construction capacity (greater supply) and the reduced growth rate (less demand) in the housing market are starting to hit many regions of the country. If it hasn’t already, your company’s market should also experience the changes by the end of the summer. Still don’t believe me? Let’s consider these additional facts.
The interest rate hikes and overall inflation immediately slowed the home buying markets. The average mortgage rate at the beginning of the year was less than 3%, so a $500k loan for 30 years meant a monthly payment of about $2,600 with estimated property tax and insurance. Today’s interest rate is now about 6%, which would make that same loan payment $3,500. In other words, that extra $900 per month is an increase of about 35% – which doesn’t even include the additional cost of living increases for all the other things a family needs, such as food and gas.
According to Richard Moss, a Platinum award-winning REMAX agent recognized as one of the top 1% of realtors in Las Vegas, NV: “Homes are falling out of contract because of the rate hikes. The typical building time for a new home in Las Vegas is about 13 to 16 months, from contract to keys. The lenders can only lock an interest rate for three months, so one example was the home buyer signing the sales contract with an expected payment of $3,600 per month. After the rate adjustments, the payment was $5,700 per month. The buyer could no longer qualify because of debt-to-income ratios. The home builder returned the earnest money but kept the deposits on upgrades. The builder then placed the home on the market and is negatively affected by carrying costs. The buyer is now without the property and the $36,000 he lost in upgrade deposits.
Another thing realtors are witnessing is that new home builders did not offer agents any commission to bring new clients during the red hot market, but now that has completely changed. New home builders are offering standard commissions. It is not hard to understand when mortgage applications are suddenly at a 22-year low.”
A TDC client in a western US state remarked last week: “Todd, we have seen a big swing in the market for both the LBM and engineered components (R/F trusses and wall panels) from residential to commercial projects. Our company is doing well within our market, but I am worried about sustaining our profit margins because of the falling lumber prices and added competitiveness for commercial projects.” His statement about profit margins caught me off guard because I had already provided advisement for his company to prepare for this. I then asked him how much of my (TDC) suggested best practices and pricing methods they had implemented, although I knew what the answer would be. Sure enough, he stated they have been so busy that many of the TDC best practices suggestions, including the better pricing methods that show true profitability regardless of material cost variations, have yet to be implemented. Could I help him with this problem with a follow-up consultation? Yes, of course. It is never too late to begin implementing better practices and pricing methods to retain profit margins while not losing sales.
When everyone invests in new equipment and buildings, which everyone has been doing, that is not enough to keep the competitive edge and maintain profits. Those who continue to use the excuse of not having enough time during the last months of good markets will pay dearly when they suddenly find themselves with low-margin sales and very short lead times. Not enough time, lumber prices dropping, personnel issues, increasing competition, and a host of other problems will only worsen as our economy continues to struggle. On top of those problems, I hope you are not expecting the government to resolve the inflation and supply chain issues anytime soon. Your company should not wait and can take action now with steps beyond capital investments to prepare for the pending storms. Are you truly ready for what’s coming your way?
The team of TDC is your best source for learning about proven and practical lean manufacturing best practices combined with industrial engineering principles to keep your company at the leading edge of competitiveness. No one is better at providing your team with proven results for good employee practices, pricing, truss labor estimation, and so many other best-in-class practices. TDC’s tailored solutions are for the client’s specific needs. Go beyond the typical software and equipment vendor recommendations for your operations and do what many have dared to do. Embrace the Drummond Method, and your company can experience cost savings, and net profit gains that usually take months or years can be accomplished in weeks or months, resulting in an average of 3 to 6 point net profit gains for CMs. All areas are addressed, not just the manufacturing. Please do not take my word about TDC’s services, though. Read the public testimonials many current and past clients with decades of expertise and experience have been willing to give: https://todd-drummond.com/testimonials/.
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