A cycle timeout

Worried about housing affordability? The media certainly is, and they’ve come up with a new way to help you share their concern. It’s a game, and it’s called “What Is Housing Affordability Worse Than?”

Fortune led off the latest round by noting that “housing market affordability is worse now than at the height of the housing bubble in 2006.” Then CNN Business jumped in and raised the ante another 22 years: “Affordability is the worst it has been since 1984.” Not to be outdone, Fox Business threw all its chips on the table: “Housing affordability (is) at an all-time low.”

Actually it isn’t. They’re just trying to make the point that everyone is stressed out about housing affordability. Except that’s not true, either.

Home buyers seem to be doing just fine, at least judging by new home sales in July. Despite a median price tag of $436,700 and mortgage rates over 7%, annualized sales landed at 714,000, up 31.5% YoY—and slightly above the 20-year average.

That’s the good news. The bad news is that existing home sales are in the dumpster. July sales were 4.07 million annualized, down 32.5% since July 2021. The median price was $406,700—not quite an all-time high—but that’s not the reason.

The obstacle is that the for-sale inventory of existing homes is so low, no one can find one to buy. Where did all the homes go? Zonda says more than two-thirds of those missing sales can be traced to homeowners with sub-3% loans, who would sooner give up a kidney than their mortgage.

Actually, it wouldn’t help if they did. Aside from the fact that giving up a sub-3% mortgage would be a monumentally stupid financial decision right now, nearly everyone who sells a home buys or rents another one. The effect on inventory is a wash.

If it’s surprising that people are willing to stretch their finances as far as they have to buy homes, it’s even more surprising that half of them are first-time buyers. In a normal market, first-timers make up 30% to 35% of the total.

According to Zillow, 45% of home buyers these days are under 40, and nearly four out of five are buying single-family homes. Millennials range from roughly 28 to 41 years old at the moment, so it’s now or never for many of them. Zoomers are just starting to enter the picture, but in both cohorts, virtually everyone—95% and 96% respectively—says they want to be a homeowner. 

That’s why everyone also thinks housing demand is going to be exceptionally strong for years to come. John Burns Research & Consulting says we’d need 17 million new units by the end of the decade to catch up to population growth. That’s roughly 2.4 million starts per year, and capacity isn’t even close to that.

In turn, that suggests that when mortgage rates finally do ease up, we’ll be in for a long spell in which demand exceeds supply no matter how homes get built.

Cycle time is already important to most builders. In an environment where they can sell homes as fast as they finish them, they’ll be obsessed with speed. Dealers need to pay close attention because builders’ priorities can change quickly. The question is how they might change.

Everyone knows prefab components reduce framing time by as much as 80%, and reduce the need for skilled framers. You would think that between the coming need for speed plus the shortage of framers, we’d be seeing a surge of interest in offsite construction for single-family homes.

You would be wrong. Builders have embraced roof trusses. Roughly two-thirds of single-family homes in the U.S. are built with trusses. But while estimates of the market share held by panelized and modular construction vary depending on who you ask, the numbers are small—and falling.

NAHB’s Home Innovation Research Labs (HIRL) says wood-frame modular and panelized homes held a combined 9.1% share in 2020, down from 10.7% in 2017. The Census Bureau’s Survey of Construction says modular, panelized, and precut homes accounted for a measly 2.5% of total completions in 2022. The high water market was 6.7% in 1998.

Prefab proponents insist that market share is low simply because builders are resistant to change. It does seem that way judging by the latest HIRL survey. When HIRL asked home builders why they would not adopt offsite methods, the No. 1 response was total mush: “No need to change—site built works fine for us,” said 49% of respondents.

The No. 2 response may be a clue. 45% told HIRL that “the inability to make last-minute homeowner changes in layout or design keeps them from going offsite. Builders tell us that last-minute changes in houses built using offsite techniques can negate any gains in efficiency that they provide.”

It isn’t that builders don’t care about jobsite efficiency. They just care more about responsiveness to clients’ needs. That’s nice, but it’s hard to imagine them giving up profitability in the process. In fact, they aren’t.

The Census Bureau tracks start-to-completion time for new residential structures. The S-C time on single-family homes built for sale (as opposed to custom or owner-built) has bounced around between five and six months ever since the mid-1970s.

A half century with zero improvement doesn’t sound impressive, but a simple start-to-completion calculation doesn’t account for the fact that homes are considerably larger—and more complex—than they were in the 1970s. If you factor in square footage, average S-C time in the 2010s has fallen a whopping 36% from its average level in the 1970s.

Granted, start-to-completion time is a pretty generic measure of productivity. But if you drill down to specific trades, you’ll find the same thing. But not in all trades.

Everyone talks about a shortage of trade labor, but the shortages are really confined to two mission-critical trades: drywallers and framers. Mechanical and roofing subs employ more production workers today than they did at the peak of the bubble in 2005. The number of production workers employed by drywall subs is about 65% of what it was in mid-2005. Framers are at about 45%.

But productivity is up significantly in both. Across all trades, the single-family square footage completed per production worker in 2022 was 10% below its 30-year average. Framers were 21% above their long-term average while drywallers were up 26%.

Panelization does reduce framing time; they’ll reliably shave eight to 12 days off the schedule. But a panel plant is a multimillion dollar investment, and framing makes up just 10% to 15% of total build time even when you stick-frame. If you’re serious about reducing cycle time, there are bigger fish to be fried.

The rule of thumb is that the build time on a typical single-family home ranges from 90 to 120 days, so let’s split the difference and call it 105. The Census Bureau says that since 1973, total start-to-completion time has averaged 173 days. That means 68 days of downtime scattered throughout the project.

Some of those delays are unavoidable—weather, for example. But regardless of the cause, downtime plays havoc with a builder’s financial performance. Scott Sedam of True North Development, a Lean building expert and a former Pulte exec, explains how:

If a builder can complete each home in 90 days, says Sedam, “we launch a house per week, and after three months, each start clears the schedule—and the ledger.” If it takes 180 days, “we wouldn’t see revenue for six months, requiring far more capital and more carry costs. Your pretax net may still look fine, but your return on assets for a one-year period falls precipitously.”

It’s a domino effect that plays havoc with suppliers’ and subs’ profits, too. Delays mean slower draws so it takes longer to get paid. Special orders sit in warehouses where they’re more prone to get damaged. The construction super gets overloaded and stuff falls through the cracks, then everyone wastes time putting out fires.

Panelizing will reliably shave eight to 12 days off the schedule. But even if you build panels, you should be thinking bigger than that.

NAHB says the typical builder uses 24 subcontractors on a new home project. A full-line construction supplier typically provides materials for a greater portion of the project than any other supplier—not just framing, but exterior cladding and trim, windows and exterior doors, a sizable chunk of the interior finish phase, and often a piece of any outdoor structures.

Because they’re involved in so much of the project, full-line dealers are in position to help address more of those 68 downtime days than any other supplier.

In the early 2000s, a study of construction productivity published by NAHB found that construction workers typically only spend 50% of their time on activities that move the project toward completion. The other 50% is wasted on work stoppages that occur for a variety of reasons. Those reasons are a road map for anyone who wants to reduce cycle time.

Some of them are issues a supplier has no control over. In some cases, the super can’t avoid them, either. But of the four most common reasons for delays, one is squarely a supplier’s responsibility, two could be your fault, and the fourth is an issue you can help with even if you don’t control it.

Waiting for resources (14%). Everyone knows this drill: The crew is on site but the materials aren’t, or vice versa, or maybe labor and materials are both ready but the crane isn’t there.

It could be the supplier’s fault or it might be the super’s mistake. You can help construction supers avoid mistakes by staying in close touch and pushing them to place orders on time, but if that happens, it is 100% your responsibility to make sure your materials are delivered on time and in full. The catch is that everyone thinks they do it well, and not everyone does.

That’s why tracking on-time, in-full (OTIF) deliveries ought to be as fundamental as tracking profit margins. It isn’t. A 2022 survey of leading independents found that fewer than half of the respondents do it.

Among those who do track OTIF, the top performer scored 98.7% while the low score was 83.0%. The average was 91.3%, which is more than reasonable. If you can show customers that nine out of ten deliveries go out the gate complete, correct and on time, that’ll satisfy most of them.

Accomplishing that is a 50-50 proposition, though. The first half is making sure your yard crew and drivers understand how mistakes and omissions screw up a construction schedule and how much it costs to correct them. Then monitor their performance, which is easy if you track OTIF.

The second half is on the salesperson’s shoulders. Every order should be complete, correct, and processed in a timely manner—and that’s just the baseline. It’s equally important to manage builders’ expectations.

Never ask builders when they want a delivery. They’ll always ask for a first-out tomorrow morning. Instead, find out when the crew will need the materials and deliver them with just enough cushion to account for common problems like traffic or flat tires. If you get pushback from the builder, you’ve got an easy alibi: Just-in-time delivery reduces jobsite theft.

OTIF is also a powerful competitive weapon. If your score is high, you can brag about it endlessly. Even if you score low, it’s still a talking point if your competitor doesn’t track it. There must be a reason why he doesn’t track OTIF, right?

Waiting for assignment (7%). This is nearly always the super’s fault, but there may be extenuating circumstances. Sedam says a good construction superintendent ought to be able to handle 12 homes at a time and do justice to all 12. In the real world, it’s not uncommon to see supers juggling 15 to 25 projects, and maybe more.

It’s a rare salesperson who has earned enough trust to direct a crew in the super’s absence. They do exist, but if you’re not sure whether you’re one of them, chances are you aren’t. What you can do instead is take other chores off the super’s plate so they aren’t quite as overloaded.

Most of it is stuff every salesperson should be doing, anyway: Push the super to make special order decisions on time. Make sure the trades have the specs they need. Spend time on the jobsite to make sure your materials are installed correctly.

Know your boundaries, but the more you take off a superintendent’s plate, the more indispensable you become—and the more leeway you’ll have in your pricing.

Multiple material handling (6%). Delays due to multiple material handling are almost always the supplier’s fault and it’s another baseline issue. Unless there are insurmountable obstacles on the site—i.e., a crane blocking the street or a pack of Rottweilers in the front yard—every delivery needs to be staged so the materials are in position and don’t need to be moved.

If the crew isn’t on site, your drivers need to know how to stage each load. If they don’t, it’s on you to teach them. It’s not hard to teach (or monitor) as long as they take a photo of each delivery package once it has been staged. They do, right?

Inaccurate information (5%). “Garbage in, garbage out” doesn’t just apply to the tech industry. The first and foremost rule of LBM sales is, Never guess. If you don’t know the answer, the only correct response is, “I don’t know but I’ll find out.”

Construction crews don’t always do what they’re told to do, but if you’re the one telling them, you need to be 100% sure your information is complete and correct. Yeah, it’s a lot of homework. That’s what differentiates top-gear salespeople from the rest.

Beyond the four most common causes of work stoppages, there is plenty more you can do to chip away at those 68 days of downtime.

Most dealers value engineer the plans they receive to reduce excess material and make their quotes more competitive. So do it aggressively and look for ways to save time, too.

Could be the products you quote. Sheathing with an integrated air-water barrier goes up faster than OSB followed by housewrap. Floor trusses reduce the time it takes to run pipes, wiring, and ducts—and the time it takes to repair the framing once the mechanical subs are done. Could be the layout: Small tweaks to room dimensions can speed up interior finish by reducing the time spent cutting and fitting drywall.

If you get the go-ahead from the builder, you may need to babysit the crew for the first installation or two. But if your suggestions work as advertised, you’ll no longer be quoting apples to apples. That makes it harder for competitors to steal business with a lowball bid.

You can also save time on the jobsite by prefabricating headers, corners, and partition blocking. Material, too, if the framers have been doubling up trimmer studs or using load-bearing headers where they aren’t needed just so they don’t have to think about it.

But if you’re really serious about reducing cycle time, turnkey labor and material will give you the biggest bang for the buck. It gives you the ability to eliminate the No. 1 reason for work stoppages, and it’s not that hard to get past the perception that you’re competing with your subcontractor clients.

On the contrary, you’re feeding them work. They don’t need to sell the job or collect their money—all they need to do is meet your quality standards, and turnkey gives you a say in setting those standards.

With product lines that are particularly sensitive to installation mistakes (e.g., windows and doors), you get greater control over the process. If you collaborate on shell construction, you’ve both got an incentive to prefab assemblies or switch to products that will save time.

Plus, turnkey framing eliminates the debate over panels versus stick framing. It’s no longer the builder’s business how you build the shell as long as you deliver the quality you promised when you promised it.

No one knows for sure how far underbuilt we are right now, but it’s a very safe bet that we don’t have nearly as much housing as we need—and that we don’t have as many framers as we need to catch up quickly.

Throw in the fact that record-high prices plus elevated mortgage rates have not discouraged buyers, and we may be in for an extended boom even if prices don’t come back down.

We’ve been through periods in which builders can sell everything they build just as fast as they can build it. But in the past, those periods have never lasted longer than two or three years. This time the party could last a decade or longer. If so, it stands to reason that builders’ priorities will change. As long as we’ve all been in the business, every dealer’s goal has been to be the low-cost provider in the market—either the lowest prices or the lowest total installed cost.

In a drawn-out boom where high prices are the norm, better to have a reputation as the high-velocity provider in the market.

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