The state of the home construction market
This article is part of 2022 – 2023 Housing Market Update Series. After the series ends, join us on February 6th for HW+ Virtual 2023 Housing Market Update. The event will bring together some of the leading economists and researchers in the housing field, and will provide an in-depth look at the outlook for this year, along with a roundtable discussion on how to apply these insights to your work. event exclusively for HW+ membersand you can Go here to register.
2022 was a unique time for homebuilders. With the continued disruption of the supply chain, increasing cost and fear of inflation, the market was weak at best. Each year, we poll our homebuilder community to find out how the market affects their business and a look at their day-to-day operations.
Fortunately, it’s not all bad news. While much of the homebuilding industry has seen turbulent times, we’ve also seen resilience in our building community. Our coming Report on the state of the residential construction industry (SORCI) It would reflect how builders braced for the impact: Although the rate of new contracts slowed, margins did not decline. 31.1% of builders showed profitability with $1 million plus contracts on average. The increase in construction workers’ salaries is justified in comparison to 58.1% of builders seeing their sales revenue increase in 2022. This figure is expected to increase to 72% in 2023.
Here are some of the major factors affecting the home construction market.
40% of builders say they still struggle with understanding how to capture the right leads for their business. This is an important piece of the puzzle for scaling operations. The solution is much simpler, too, than builders think: It’s as easy as putting quality content in front of the right audience to produce the right leads. This content can be in the form of blog posts on your website, to promote your business with consistent content on social networks or to develop the right connection and frequency with your audience.
One key tactic that may seem simple but is often overlooked is the importance of follow through. Providing the prospect with information that will continue their education with your business, not overwhelming them with it, gives the prospect the freedom to explore what the next stage in the sales process looks like. Ultimately, a huge opportunity awaits builders who understand the importance of this factor in their business.
61.8% of homebuilders in the United States relied on subcontractors to run their businesses in 2022. Unfortunately, delaying subcontractors remains the number one challenge for 37.1% of builders—an even worse statistic internationally. In order to manage projects effectively, builders must take into account that there can be frequent rescheduling of jobs given the labor shortage. If builders decide to make use of subcontractors, the smart ones will ensure that they manage their project schedules accordingly and put in appropriate lead times.
A documented process can help builders achieve industry standards. For example, builders can set goals such as a gross profit of at least 25%. They can also perform post-project audits which over 52% of construction companies now rely on to assess budget, schedule and customer feedback.
Residential contract values
Considering the various factors in the construction process, builders must remain firm in understanding fixed-price versus open-book (or cost-plus) contracts, and how to ensure that they price their jobs correctly in order to profit.
Two-thirds of the builders we surveyed work on fixed price contracts – we recommend this to our clients as well because fixed price contracts provide higher gross margins regardless of material price increases. In addition, 30% of the builders we spoke with stated that by using fixed-price contracts, they were able to add more than 25% to their projects. For builders relying on cost plus contracts, 25.3% of them were signed with less than 13% of gross profit unlikely to cover the fixed expenses of the business.
Builders are getting smarter about their finances, which includes planning for project success. The successful builders we spoke to ensure their financial security by working with tools like project management software that help fill gaps that may leave a gap in the business.
Looking ahead, there is a lot to be positive about as the home construction industry continues to navigate the current landscape. While things will always be uncertain in business, smart builders understand circumstances and use them to their advantage. Learning how to pivot is not only necessary, but important now more than ever.
This column does not necessarily reflect the opinion of the HousingWire editorial department and owners.
To contact the editor responsible for this story:
Sarah Wheeler in [email protected]