It’s fair to say that 2022 has been a depressing year for homebuilders. After record sales in 2021, demand for new construction waned throughout 2022 as the Federal Reserve raised interest rates cutting into home buyer’s purchase power and making financing new development projects even more costly for builders. All the while, builders continued to face supply chain issues, labor shortages and wild fluctuations in material costs.
All of this has resulted in a nosedive in homebuilder sentiment. As we head into 2023, HousingWire sat down with Chris Boyd, the vice president of product at construction finance company Built, to discuss what we should expect from the homebuilding and construction industries in the coming year.
This interview has been edited for length and clarity.
Brooklee Han: Before we dive into what to expect in new construction in 2023, what do you feel are the big takeaways from 2022 for the home building industry?
Chris Boyd: I think that even though there have been some pretty incredible spikes, whether it is inflation and interest rates, or just the general cost of doing business and all the supply shortages related to labor et cetera, the demand for construction was not as impacted as I think people anticipated it was going to be. If you look back, the macroeconomic stuff is tied back to the fact that when COVID initially hit it slowed things down even further and this is after we were already trying to catch up from the significant downturn in 2008, so there is so much more demand than there is supply today. As a result, I think it has actually insulated some aspects of the market. When I think about takeaways from this year, I think we learned what is kind of the breaking point, especially for the single-family residential consumer market where interest rates and the cost of capital reached that level where suddenly demand started to drop even though supply hasn’t caught up yet. I think this might give us a chance to catch up a little bit holistically, but overall, I think we have been more insulated than most people anticipated.
BH: I think a lot of builders would love the opportunity to catch up on some of their projects, but for many, supply chain issues have been preventing this. What are you expecting to see next year in terms of supply chain issues?
Boyd: A lot of the supply chain backups are related directly to the labor shortages. Like septic tanks and propane tanks that require specialized skills to build because when COVID hit a lot of people either retired early or looked for other career opportunities, so it is going to take a while to build up the manpower again. What I tell a lot of builders today is to do a lot of research into which manufacturers and vendors are encountering some of these labor issues. Some vendors thought ahead and stockpiled some inventory so they can get stuff to you pretty quickly, but then others are still really backed up. But as demand drops, it will give supply chains an opportunity to catch up, but for some they have a two-year backlog, so it will take a while.
BH: You mentioned a labor shortage in manufacturing some of the components that go into homes, but a lot of builders I have spoken with are also dealing with labor shortages at their construction sites. Do you see this changing at all moving forward?
Boyd: Labor is a real problem and it is creating other problems for builders. If you are competing with multiple people to provide a specific service from a construction labor perspective and now you are one of the only crews around, the quality level doesn’t have to be as high, and you can get in and out really quickly because people can’t be as picky. That has a negative impact because the overall quality of things can drop — it doesn’t always but it can. So even if you have thought ahead and received the materials, those materials might end up sitting for extended periods of time because of a labor shortage and then you are dealing with whether or not you need to get insurance for those materials in case they are damaged just sitting there. Then to add insult to injury, the individuals who are providing the labor can be pretty particular about who they work for, and they can be somewhat demanding as to what they expect from those they work with. So, in the past, it was acceptable to wait 45 to 60 days to get paid, but now you are going to have to pay them more quickly — they don’t want to have to track down money they are owed. So, what I am seeing and what I expect to see moving forward, is that those who pay people really quickly and keep friction low, are doing a better job of retaining laborers, so they are not hit as negatively by the labor shortage.
BH: What are you expecting to see in terms of demand for new construction heading into 2023?
Boyd: First, there is obviously going to be a lot of geographic nuances to this where certain markets are going to be pretty hot — Texas is doing really well and Florida, in spite of the hurricane, there is still a pretty hot market there. Then the Midwest was growing very fast, but it has slowed down. But when we break it down a little bit more, custom home builders have a bit more flexibility in the sense that they are selling to a market that is not as capital constrained because they are not getting financing, so interest rate hikes have less of an impact. So, I think we will see some reduction in volume there, but it is not going to bring into question whether or not they have continuity in their business. In contrast, I am hearing of lots of builders on the spec side where they have a lot of materials on the ground, but they are making game time decisions as to whether or not they should build or keep building because they don’t know if it will sell. So, the spec side is being more heavily impacted, and I think it is a good early indicator of what is going to happen to demand overall.
BH: I am hearing from a lot of agents that incentives and buyer broker commissions are coming back to new construction sales. What do you expect to see in terms of incentives for agents moving forward?
Boyd: It is just amazing to see the transition where at one point spec home builders were unwilling to do pre-sold homes because they could basically put them up for auction at the end of construction and get top dollar, to a world where incentives are coming back because they are trying to move inventory. With these incentives it is going to be interesting to see how quickly inventory is being absorbed by the market and how that absorption rate will influence incentives they are willing to provide. Many of these home builders are getting construction loans themselves or lines of credit in order to finance the construction, and those are often higher interest loans than what a consumer is going to get on a 30-year fixed rate mortgage, so the builders are going to be interested in trying to move that inventory as quickly as possible. They are also probably going to be trying to pursue things like bridge loans that have a little bit of a lower interest rate just to hold them over until that inventory moves. But all of this has a domino effect because if a lender is not seeing a good absorption rate, then they are going to be less motivated to offer them the same line of credit or extend more loans to them. So, those incentives are going to be clear because those builders have to show that they can move inventory or they are going to be hindered in their ability to obtain capital to build more.
BH: Price drops are another way builders are trying to get buyers in the door. What are you expecting to see in terms of pricing and pricing strategies in the coming year?
Boyd: I live in Nashville and builders are still able to move things pretty quickly here because there are a lot of people moving here right now, but I know that isn’t the case everywhere. If I zoom out, holistically, I don’t think you are going to see rapid price drops — I think there will be specific markets for that, but I think it is going to be gradual at first where people are still feeling aggressive as to what they can get for a home. Costs overall are still very inflated and so that means that even if somebody came off of the price 3%-5%, they are still doing really, really well on that property. Everybody has a bit of a wait-and-see mentality of, is that sufficient to move the inventory? Or are they going to have to keep moving down if they aren’t seeing results? But I would be very surprised if you saw a really heavy drop all of a sudden. I just don’t think the market needs that in order to move the inventory, at least from what we are seeing.
BH: Variation and changes in material costs have been another major challenge for a lot of builders. What are your expectations for material price stability moving forward?
Boyd: We have seen such variation in things like lumber, which has come back down, but the other materials that don’t get talked about quite as much like copper or PVC can have a big impact on the overall cost. Sometimes bills are coming back for items at two or three times the estimated cost and that type of fluctuation is not something you can just absorb or use your contingency for. There was a time when you could tell consumers that you needed a 10% to 15% contingency on a project, but now, if you are doing less than 25% you run a much higher risk of being upside down on the project. I think the days of fixed bids are going to largely disappear and you are going to see a lot more cost-plus contracts because builders can’t run the risk of absorbing all of that volatility.
BH: You have mentioned builders using this slow down to catch up a bit on some of the project they have yet to complete, but are you seeing other ways that builders are using this time to regroup?
Boyd: I think it is really forcing a conversation around efficiency. The construction industry, as much as I love it, tends to have some resistance to doing things a different way and when you are making money hand-over-fist, it is hard to see why you might need to do something differently. But now we are seeing a lot of builders and other people in the construction industry ask questions like, ‘How can I reduce my operating costs?,’ and ‘How do I retain the vendors and subcontractors I am working with?’ Through all of this, we are starting to see more professionals explore technology options and how those can help them become more efficient.
BH: We have talked a lot about homebuilders and new construction in general, but what can we expect from Built in 2023?
Boyd: We want to be able to answer the call for more technology solutions for all of homebuilder’s pain points, especially in the realm of getting everyone paid on time and creating transparency in that process. We want to be like the Domino’s pizza tracker for construction. Then everything around construction is rife with people trying to mitigate their risk and it is the right thing to do, but a lot of that entail documentation, whether it is invoices, lien waivers, sworn statement of W-9s, all of this could be digitized and simplified, so we are investing heavily in those areas because we want to support the industry and ensure that everyone can continue to make a living in this space and work to better meet the demand that will exist in the industry for quite some time.
