This week I read that Ivy Zelman, generally acknowledged as the top homebuilding financial analyst, was laying it on pretty heavy to builders at a conference that their reluctance to supply entry level housing was one of the most significant drags on the entire industry. We have heard repeatedly that Millennials are substantially priced out of the market despite their desire for home ownership. If the entry level drags, everything drags. Yesterday I spoke with a friend who is a partner in a large VC firm that has significant investments all over the country in about everything ... but entry-level housing. Why? They just don't see the profit opportunity there.
So who's going to build entry-level? Great question, but until it's solved, everyone else building the move-ups will see their opportunities restricted. The key issue here is cost and builders by and large live in a strict paradigm that says if land, labor and materials are all up – which they are – how can we possibly build entry-level housing at the margin we need? Now comes the scary part. Everyone is looking to a Fed rate increase this fall, and then what? If the entry-level buyers cannot afford these homes now, how will they ever afford them when mortgage rates begin their inevitable climb?
What everyone is missing are the huge opportunities for cost reduction in process, the way we do business every day. Builders spend a ton of time focusing on reduction of direct labor and material but one of the great revelations in our work with more than 130 builders on Lean Process is that so much of the loss in labor and materials stems from failed or inadequate process. It is through a major overhaul of process that builders will find the margin to successfully meet the needs of entry-level buyers (and increase profitability in every other segment, as well. Those few builders who solve this challenge will reap exceptional profit while the rest of us will owe them, big time.
This is not mere "tweaking." This is changing the very way you think about the business. Send for a copy of our PDF "Bridging the Margin Gap" and begin your journey to process mastery, a journey that will show you the way to stronger margins. This is the one operating strategy that is sustainable in any market condition. Just email to [email protected] and enter "Margin Gap" in the subject window.
Scott Sedam is President of TrueNorth Development, the industry-leader in Lean process improvement implementation with more than 150 builder clients in 5 countries. Scott is also a Contributing Editor for Professional Builder Magazine. His monthly columns and continuing blogs can be found on www.probuilder.com. Contact Scott direct via [email protected] or 248.446.1275.
