Editor’s Note: While this article was writing during the COVID-19 pandemic and describes the resulting disruptions to the housing industry, issues of housing availability and affordability, and a shortage of skilled labor, persist. We trust the information remains valuable, despite recent changes that may have occurred.
The home building industry has been charging along at a pace beyond what we could have imagined or even hoped for following the outbreak of COVID-19. How ironic that one of our biggest challenges—if not the largest of all—is the nationwide shortage of skilled labor, a deficit of roughly 300,000 jobs across all trades. The huge increase in national unemployment, if it had arrived in a more typical recessionary period, would have dealt a massive blow to home building, leaving millions in construction among those unable to find work. Yet, here we are, with strong sales, great cash flow, abundant profits, and not enough people to build the homes.
Before we go patting ourselves on the back for a robust recovery from COVID, however, let’s be honest: This mostly happy situation was not our own doing but was the result of remarkable, unexpected societal and cultural changes brought on by the pandemic, backed by a trillion or so greenbacks courtesy of Uncle Sam (oh yeah … that’s us, the taxpayers). More accurately, it’s our kids and grandkids who will foot most of that bill.
I am in no way saying that federal stimulus money was wrong, I’m just acknowledging reality. The pandemic has been a war of a different type than we are used to, but it’s a war nonetheless. By way of comparison, the U.S. debt-to-GDP ratio was considerably higher during World War II than it is today, and you never hear anyone suggest we overspent fighting Hitler and Tojo. The question of whether the money has been spent in all the right places during our current crisis notwithstanding, most of us accept the enormous outlay as something our nation simply had to do.
What's Driving Home Sales
The societal and cultural changes driven by COVID-19 will be studied, analyzed, and written about for years to come. We are nowhere near the final word on this pandemic, but a few things are already clear. After a year spent largely in our own homes and with so many people working away from the office, millions want something different or better in their housing arrangements, be it major remodeling or something entirely new. Whether we just got sick of our previously acceptable environs or genuinely need more or improved space, this rising tide has lifted all boats, from The Home Depot and Lowe’s, to paint stores and carpet companies, to remodelers and, of course, home builders of all types and sizes.
There are troubling signs, however. Year-over-year sales by month have dropped and mortgage rates are rising. Each day sees another article or blog post about potential customers being priced out of the housing market. Couple that with concern over costs: Land and lots are scarce, with prices increasing, and everyone is hurting from the astounding rise in lumber prices, which are triple or more since 2019, with most other material costs rising as well.
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Labor rates, meanwhile, are driven by a classic scenario of demand outpacing supply. The labor pool has yet to fully recover from the pre-crash levels of 12 years ago, and there’s no indication it will until later this decade—and even that may be wishful thinking.
There is genuine promise in off-site manufacturing applications for home building, yet beyond traditional trusses, panels, and components such as pre-hung doors, the industry penetration of true off-site–built homes remains about 3% as of 2019. That will change and inevitably increase, but only a handful of builders will find significant labor relief from manufacturing methods in the near term.
The bottom line: The shortage of trades will remain a key factor in home builders’ shrinking margins during the coming years. TrueNorth team members hear this wherever they go, and most builders will find the trade shortage element in this equation is something they just have to accept and pay the price.
An Unlikely Advantage for Some Home Builders
Yet, it doesn’t have to be this way. In fact, I’ll go so far as to say the trade shortage is one of the greatest opportunities in the past 30 years for a builder to establish true competitive advantage. The fact that most readers will believe this notion a fantasy, or perhaps even pure rubbish, is what creates the opportunity. Of course, we’re talking about the concept of becoming the builder of choice, the one the best suppliers and trades want to work with—and not simply because that builder pays the most.
I first heard the term “builder of choice” 32 years ago in 1989 when I was working at Pulte Homes and Bill Pulte presented the concept at a board of directors meeting. At the time, the board members were mostly New York financial types and, suffice it to say, Bill’s impassioned description of his goal of always being the No. 1 builder in the eyes of the trades in all markets was pretty much lost on them.
I first heard the term “builder of choice” 32 years ago in 1989 when I was working at Pulte Homes.
Bill was fired up in those days about concepts such as creating “customers for life,” becoming the “builder of choice,” and learning to do “right things right, the first time.” I was given the assignment of putting together the next annual report—a package describing our new strategy of “Pulte Quality Leadership”—and I managed to work in most of those concepts, with some pertinent quotes from Dr. W. Edwards Deming and Pulte Homes’ own people, along with all of the requisite financial data, of course.
We were trying to change the culture and wanted to demonstrate that to investors. Similarly, putting it in the annual report convinced our own people this was not just some new flavor of the month. The artwork was done by a hot, young designer from Detroit who pushed us. It was beautiful, bold, informative, and—as I soon found out—the board hated it. It was simply too philosophical for their tastes, touting ideas they neither understood nor appreciated, and thus the next annual report looked pretty much like a spreadsheet with a stiff cover on it. Just the facts, ma’am!
Lather, Rinse, Repeat
To those board members, like so many in our industry at all levels to this day, home building is a purely transactional business: buy dirt on attractive terms, purchase labor and materials as cheaply as possible, build a house as fast as you can, sell it, take the cash, move on. Lather, rinse, repeat. Skip all of the warm, fuzzy stuff about building relationships and helping make all constituents successful. That’s pure distraction from the real job of making money.
The profound irony then—and today—is that the builder-of-choice philosophy is all about making more money. My even more profound disappointment all those years ago—and yes, today as well—is how few in our industry truly get it. There is indeed much chatter, lip service, even pandering to the idea of genuine “trade partnering,” but talk to the trades directly and you’ll find it’s a rare relationship that meets the standards required.
And therein lies the opportunity: If such a relationship is a rare thing, what are the implications for those builders that become the true, trusted providers in their markets? What would it mean if that builder is the one trades and suppliers prefer to work with above all others? And what would be the impact if the trade’s best crews clearly indicated their preference to work on your sites? Before you proclaim, “Sounds nice, but just not possible in this market,” spend some time brainstorming the outcomes with your people.
We’re talking about the concept of becoming the builder of choice—the one the best suppliers and trades want to work with.
If you could achieve it, what would it mean? You’ll generate some initial excitement but, sadly, after that wears off, most of you won’t find sufficient motivation to do the hard work required to get there—and thus eliminate your trade shortage. But that’s great news for those few builders that do.
So, for the rare builders that accept the challenge, where do you start? My colleagues at TrueNorth have had the good fortune of conducting more than 200 Lean process implementations, which have included working with nearly 5,000 supplier and trade companies. We listened, which resulted in a long list of things that truly make a difference. We boiled it down to the 12 essentials listed below.
This list has changed a bit since the last time I compiled it about five years ago. It reflects some growing maturity in builders, suppliers, and trades alike, and an increase in their understanding of what’s required to be effective, efficient, and profitable while delivering high-quality homes. If this list leaves you hungry for more detail, then great, create your own by defining exactly how you would achieve each one. In my next column, I’ll cover each of the 12 elements in more detail. Meanwhile, this should be enough to get you started on a plan of action to eliminate your trade shortage once and for all.
12 Difference Makers to Become the Builder of Choice
1. Fair, quick, on-time payment
2. Trades and suppliers treated with dignity and respect
3. Clean, safe, organized jobsite
4. Competent, fully trained builder field staff
5. Quick access to builder personnel
6. Fully accurate and complete bid packages
7. Fully accurate and complete start packages
8. Final plans provided with construction drawings
9. Reliable construction schedule with lead time and no “scouting”
10. Variance purchase orders rare to none
11. Back charges for rare to none VPOs
12. Early input into plans and specifications from suppliers and trades.
- Read part 2 in this series: Solving the Labor Shortage in 12 Steps