Building Science in Action

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Business & Marketing How the Interaction Between Lots and Labor Impact the Building Recovery

By John McManus

That BUILDER’s lead February feature story should focus on the bets builders are taking on lots that by some lights get classified as “B” or “C,” or even “D” lots means that home builders are taking some bold, “if-you-build-it … ” steps to catalyze a next forward thrust for housing’s stubbornly slow recovery.

That our story, which pinned down six projects moving outside of the A and B lines in 2016—many of which are finally starting, restarting, or just reaching stride after a hiatus, should intersect this week with headline news around macro jobs data, and, more specifically, construction labor is one of home building’s unique phenomena that never ceases to amaze.

Logic that seems rigorous in its path winds up circling back on itself. Prophecy more often than not is self-fulfilling. Odd that as global flux in demand has set both signal and noise into wildly gyrating patterns where positive present fundamentals may be cancelled out by gloomy future projections, and where dire prediction is often offset by solid and sustainable foundational, real-world forces in play.

So, let’s look for a moment at a particular vector in our recovery plot line. We’ve been hearing in public home building earnings commentary and taking note for months in plans for community-count expansion, and hearing from our Metrostudy regional analytics mavens that vacant lot development has focused tactically on opportunity to step down the new-home pricing ladder to bring more sub-$300s and even more $200s product into the for-sale inventory spectrum.

Now, how does this intersect with the latest data set that National Association of Home Builders chief economist Robert Dietz analyzes in his take on the latest Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) report?

It’s a critical juncture.

Consider that construction job openings–which Dietz notes jumped from 138,000 in November to 207,000 in December (the highest openings count since 2007)–represent going-concern firms with posted open positions for skilled workers. What this figure does not expose is that, not only are there those open, unfilled positions, there are also fewer firms.

Now, labor capacity at equilibrium is not necessarily X number of firms, where X was the number pre-Great Recession. However, what we do know is that some of the labor capacity dislocation that played out profoundly in 2015 and will likely continue in slightly varied form and fashion over the next few years traces to the fact that a lack of trade companies–not just a scarcity of skilled laborers–is causing the pain.

For example, if there were five rough finish framing companies in your market vs. the two or three you have a choice of working with, how would that change the economics of your operation?

The issue is this. The pain points around labor and the pain points around lots intersect. C and D lots are absolutely less risky if the variables around labor capacity and competence are known and managed. A D lot at a retail price for one builder, and the same D lot at the same price for another can result in two entirely different margins–even a loss–if the labor capacity, scheduling, competence, and costs factors run amok.

There’s no absolute number of workers across all of the trades that is the correct amount of labor capacity. So, measuring labor force head-counts vs. units started in historical contexts will prove to be a red herring. Automation, materials innovation, process improvement, training, and factory fabrication of systems or components will be the moving target variables that reduce the number of skilled workers required for any number of total housing starts.

By the same token, workers who excel, whose productivity per unit of time spent is greater in terms of tasks accomplished, quality of work done, and other measures, also needs to factor into calculation of the absolute number of laborers the residential construction community needs to have in its vital hive of providers.

Importantly, what volume builders and even customer builders in active markets need is a “thick” market of competing firms who bid and reliably complete work on schedule and on budget. That’s part of the challenge in residential construction’s most prolific marketplaces right now, not just a dearth of skilled laborers, but a lack of competing firms who represent viable, relationship- and price-driven options for hiring builders.

This is where it’s clear that one of the biggest bets on lots comes down to labor as much as it does ultimate buyer demand.

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