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Managing Rising Costs and Risk

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Managing Rising Costs and Risk

Land, labor, and material costs are chipping away at home building's already thin margins 


May 5, 2019
For all the worrying about a home building slump after six years of increasing revenues and numbers of homes built, 2018 proved to have a bottom line of more of the same. 2019 Housing Giants Report
This article first appeared in the May 2019 issue of Pro Builder.

Illustration: Lisa Haney 

For all the worrying about a home building slump after six years of increasing revenues and numbers of homes built, 2018 proved to have a bottom line of more of the same. Year-over-year, our list of 245 Housing Giants in 2018 out-produced 2017 revenue by 11 percent and by 8 percent in homes closed and units completed. The latter number, incidentally, is more than twice the total annual increase in completions reported by the U.S. Census Bureau for the industry at large.

Some of the Giants’ biggest revenue gains came from those at the top of the charts, due at least in part to the mergers and acquisitions that took place over the last two years. With 70 percent growth year over year, Miami-based Lennar leapt to first on our list in no uncertain terms due to its merger in February of 2018 with CalAtlantic, itself a fairly recently merged company formed from Standard Pacific and Ryland Homes

The next largest jump in the top 20, though not a close second, went to Century Communities, which moved up to No. 13 from 18. Century’s midyear purchase of Wade Jurney Homes helped the company log a 33 percent increase in revenue in 2018. Just outside the top 20 is the Clayton Properties Group, a Berkshire Hathaway company taking advantage of its deep pockets to add several more home building companies to its portfolio. Clayton realized the largest year-over-year revenue gain on the entire list with a 114 percent increase over 2017. 

All in all, nearly a third of the companies on our list registered a 20 percent or more increase in revenue in 2018—not a bad showing for a still recovering industry. But that doesn’t necessarily mean home builders are putting more money in their pockets. Gross profit margins had been rising steadily since the recession, but in the latest version of The Cost of Doing Business Study from the NAHB, the annual increase was just 0.1 percent. 

It’s clear that no matter how much more business there is, steep land prices and rising labor and material costs are chipping away at home building’s already thin margins. In fact, availability of land topped the list of biggest challenges anticipated by the Giants in 2019, increasing by 14 percentage points over last year and supplanting the scarcity of skilled labor. And nearly three-quarters of all respondents pointed to operational efficiencies as their biggest opportunity for 2019.

As part of our Housing Giants Special Report this year, we have included two articles that lay out what some companies are in the process of doing to counter both rising costs and the possibility of a housing slowdown. The first, “Easy Does It,” from senior editor Mike Beirne, describes the transition builders are making toward using “integrated” products and systems, wall panels that include insulation and air sealing, precut framing packages, precast concrete foundation walls, and other alternatives that cut steps and perhaps days out of cycle times. Acceptance of these products and methods has been slow, but seems to be taking hold.

Stretching Out,” by contributing editor John Caulfield, offers a comprehensive look at home building companies that have diversified to minimize risk and add other streams of income. Builders have always been quick to take on different kinds of work in order to make it through the rough patches of a cyclical business or a slowing economy. But some have made these new ventures, ranging from rentals to remodeling to commercial construction and land development, into the pillars of a truly diversified operation. 

Want to start branching out but think you don’t know enough about other businesses to be successful? Take a tip from ICI Homes’ CEO Mori Hosseini, whose portfolio includes a title company, realty companies, rental management, development, and land sales. “I only invest in businesses I know something about,” he says. “I don’t make shoes.”

 

Access a PDF of this article in Professional Builder's May 2019 digital edition 

 

Written By
editorial director

Denise Dersin, editorial director of Professional Builder, Custom Builder, PRODUCTS, NKBA Innovation+Inspiration, and co-editor of Multifamily Design+Construction, has been in publishing as an editor and writer for 30 years and has worked in the housing industry for much of that time.

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