Home Builders Discuss How to Reset Material Costs

The dramatic run-up of home building costs over the past two years, coupled with rising mortgage rates, has worsened the housing affordability crisis — but maybe not in the way you think or have heard or read about.

Affordability can be envisioned as a triangle, where the horizontal axis is the number of prospective buyers who can afford a new home and the vertical axis is the monthly payment (not overall sales price) of a new home.

Where the mortgage payment for a new home is $0, essentially everyone who wants a new home can afford one. But just as the triangle narrows as you go up the vertical (cost) axis, so does the number of people who can afford a home — and right now we’re looking at a pretty narrow triangle.

At some point, either interest rates will need to come down (not likely, as inflation continues to be stubborn) or home builders will need to work with their supply chain — including installing trades, distributors and manufacturers — to bring material costs down to a level at which the market can support them.

Supplier Engagement: A Tale of Two Tactics

To be certain, home builders will attack the problem from different perspectives.

Some will send off letters to suppliers mandating cost. For installing trades, distributors and manufacturers that fail to comply with such a mandate, builders will bid out the category and swap vendors wherever they can save money.

That approach is effective in the short term, but it’s no way to treat trade and supply partners that held cost increases at bay, prioritized your orders, and worked like crazy to take care of you during the boom market.

Supplier Collaboration: A Six-Step Strategy

If you choose the path of collaboration instead of price-reduction mandates, here's a six-point guide to making that collaborative strategy work for you.

1. Start with data analytics. Specifically, compare the current cost for any house plan you built in the same market two years ago. Look at your costs by trade category, and even at a cost code level, and document how and where specific costs have changed.

2. Set up meetings with members of your supply chain. Start with those who have increased your costs the most, based on your data analysis, and ask for their help in rolling back some of those increases to achieve your goals. Keep in mind that you will likely need to help installing trades by including their distributors and manufacturers in the process — a real team effort.

3. Put everything on the table. Share where you think your costs need to be to generate sales. Be open to working together to eliminate waste. Meet with your installers in the field, walk homes under construction (as well as the ones before and after that phase), and identify opportunities to reduce costs without reducing quality.

4. Review your specification levels. Are they still suitable for your target market segment? Do a competitive market analysis (CMA) by walking your direct competitor’s products in communities near yours. What are they including that you are not? What are you including that they are not?

5. Involve your internal team. Consider creating ad hoc, cross-functional teams to look at all of the changes you’ve made in the past two years to maintain production (or tried to). Some of those processes are worth keeping, while others are not.

6. Avoid laying off purchasing professionals. A good purchasing professional is worth 10 times their cost. That said, if you have a “paper pusher” on the team who is not adding value, then by all means consider replacing that person with a higher-caliber professional.

Be strategic in your approach to cost resetting. A strategic trade should be treated differently from one that isn’t. Do your homework. Pull together the data. Be open to adjusting your specification levels. Engage your team members. Avoid laying off purchasing professionals.

Finally, don't expect great results until you flush your backlog. While your sales are down, your back-end trades are still very busy.

Read the full article, which originally appeared in the September/October 2022 issue of Pro Builder.