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Over the last 2 years the homebuilding industry has gone through vast changes, and unfortunately not for the better. Home Price Escalation, Cost Increases, Material Shortages, Labor Shortages, Reduced Labor Quality. Each of these have effectively snowballed, all at the exact same time.
While this blog will discuss the complications with accurately establishing a closing date on your new home, we will briefly touch on each of these issues as they all have an impact on our ability to provide earlier visibility of the actual date.
Home Price Escalation
Supply/Demand, it is one of the most basic principles of economics. When you have more demand than you have supply, pricing tends to go up. In our two active communities, we currently have an interest list of 20-30 times the number of sales that we allocate each month. When pricing first started making significant moves we saw a third of our interest list go away, but that third was immediately replaced with a new group. That trend has continued.
As a function of the rollover on the interest list, we have seen a shift in our buyer profile. In the beginning of our Winding Bay community our initial buyer’s were not as active in purchasing a pool with their new home. Since pricing has escalated, we are seeing a higher number of people choosing to add big ticket items, such as pools, to their home. Homeowners are also spending more in the design center, resulting in even higher average closing prices.
As the builder, I would love to be able to say that the increase in home prices was going straight to the bottom line, but unfortunately, that is far from true. Over the last 2 years most material costs have gone up anywhere from 30% to over 100%. Being a significant component to building a home, the volatility in lumber pricing over the last year has made projecting final house margins similar to trying to hit a bullseye on a dart board while blindfolded. Worse, cost increases are no longer something that is communicated by our suppliers with a 30-60-90 day transition period. It is immediate. In most cases, the cost increase is even effective on sold and/or started homes.
For RockWell Homes it all started with windows. In recent history, you ordered windows just short after house start. In March 2021, we were made aware that windows had gone to an 11-week lead time. As a result, we started ordering windows earlier. By April 2021, that 11 weeks jumped to 22 weeks and the lead time at the original order date was irrelevant.
In response, RockWell Homes ordered windows for every home under contract and pre-planned 30 homes and ordered those windows as well. All window orders were made by the first week of May. In mid-December, roughly 7 months later, we received our final house of windows that were ordered. Going forward, we will continue to order 6-9 months in advance for windows. This provides us more reassurance that we will have the windows when we need them.
While windows is the theme of this section, similar issues pop up every other day. From garage doors not showing up because there is a shortage of steel, to there being a nationwide shortage of the flex ductwork for the HVAC because it is impossible to get the small stainless steel wire that creates the structure, to appliances being on back order as a result of a microchip shortage. Over the last 2 years, if it goes in the construction of the home, it has had or does have a shortage.
Everybody has their opinion as to the labor shortage, and many of those opinions turn into political discussions, and as a result, I will not share my opinion as to the why. The fact of the matter is, for the same reason that restaurants have had to adjust their hours and/or their menu offering, there are not enough people ready, willing and able to do the amount of work/jobs that are currently available. With the increased demand for new homes, homebuilders and their trade partners are effectively trying to do more with less. As a result, we have seen a significant increase in our overall build times.
Reduced Labor Quality
Being both a lack of experience due to the labor shortage resulting in the ‘warm body’ approach and a dimishing sense of pride in work product by many in the current workforce, jobs being done right the first time are far and few between. Couple the labor shortage with it taking more visits to do the same job, you have a compounding impact to overall cycle time. While this issue is less noted in the skilled trades area (HVAC, Electrical, Plumbing, etc) where compensation is more favorable, it is frequent in the unskilled finish trades such as drywall, paint, trim, etc.
SO…WHEN IS MY HOME GOING TO CLOSE?
Our ultimate goal is to build a quality, accurate and timely home. Unfortunately over the last 2 years, the concept of timely has taken on a new meaning/context. What is a reasonable timeline to build a new home? In almost every builders standard contract, we have up to 2 years from contract date to build a home. Historically, the sale to close timelines, for the product we are building, would have been 6-7 months. With the mix of labor and material shortages, that has easily risen to 8-9 months; with many of our competitors quoting as long as a year.
In the past when the home was past the drywall stage, we were pretty confident in the delivery date within a 1-2 week timeframe. Today, between drywall and closing you run a serious risk of unforeseen material shortages to include:
On top of the material shortages, we are challenged with both the labor shortage and quality of labor that can expand our delivery timeline.
Setting a Closing Date in Today’s Environment
At RockWell Homes, our Path to Ownership includes a notification of closing date 30 days prior to closing. In the past, we would have pushed past drywall, scheduled out the remainder of the home and then been very confident in setting a true closing date. As discussed earlier, if we were to set a close date at roughly the same stage that we have in the past we are highly likely to run into 1 of 2 scenarios:
We have a backordered material item where we have installed a replacement to get through inspections and/or we are unable to do final touch up on drywall, paint, etc due to the labor shortage/quality of labor issue. While we can obtain CO and close on the home, meeting our communicated close date, we would have open items that will need to be corrected after the buyer has moved into their home.
In this scenario, we meet the Timely aspect of Quality, Accurate, Timely; but are lacking on Quality and/or Accurate.
We set an expectation and then due to wanting to ensure a Quality and Accurate delivery of the home, we keep pushing the closing date.
A Scenario 3 of it all working out perfectly does still exist, but it is the in the significant minority.
RockWell Homes’ Conclusion
Our initial reaction was to satisfy everyone by committing to the Timely Delivery of the home and stay at it after closing until we finalize the Quality and Accurate. What we have found is that the difficulty getting people out to do work when the home is under construction is amplified after the home has closed. As a result, closing out open items lists is a lengthy proposition…frustrating both our new homeowners and ourselves.
From learning the hard way, we have decided to take a new approach. Until we have a 100% complete home that we know will deliver to the end homebuyer as a 100% complete home, we will not set a close date. Now that close date could be as soon as 14-days from the notice date. Standing by our 30-day notice commitment, if a buyer can not close in 14-days, they will have up to 30 days from date of notice to close on their home with no risk or penalties.
While even this is being met with resistance, because everyone wants to know when they are going to close, we have made the decision to control what we can control. We can control the final quality and accuracy of the home. Since we can not control most of the current factors that affect our timeliness we do our best to manage this area by timely and effectively communicating everything going on with the home through our weekly calls.
We are all in this together. We wish that we could give you more accurate and more timely information. We wish that we could tell you from Day 1 when your home was going to close. Unfortunately, the world that we live in today creates too many obstacles and too many opportunities for us to fail. Until we return to normalcy, we are going to focus on delivering a quality and accurate home…and do that as timely as we possibly can.