Times have been tough for homebuilders these days.
Sales have fallen to their lowest level in decades. And the buzz of saws and staccato beat of hammers are sounds seldom heard as production rates drop to lows not seen since World War II.
But developers are benefitting from a little reported side-effect to the housing slump: It’s cheaper now to build a home.
Builders say construction costs are down 15 to 25 percent.
That translates into an average cost of $100,000 to $140,000 for just the “sticks and bricks” (without land) for a modest, 2,000-square-foot house.
That same house cost $140,000 to $190,000 to build during the peak of the housing boom just four years ago.
Builders from Fort Worth’s D.R. Horton to Arizona’s Meritage Homes and Newport Beach’s William Lyon Homes have crowed in recent earnings reports about improved profit margins due to construction cost savings.
The savings could benefit consumers as well when passed on through lower prices, some industry officials say.
But the news isn’t so good if you happen to be a subcontractor or a rank-in-file construction worker.
Thanks to cutthroat competition, these cuts are coming out of their hides.
“It’s supply and demand,” explained Rich Lambros, CEO for the Irvine-based Building Industry Association of Southern California. “When you have a productive housing market, subcontractors are busy. Now, it’s the opposite.”
Subcontractors, industry officials say, have reduced their overhead and streamlined their operations to stay in business.
To survive, the plumbing, framing and roofing firms also have laid off as many as 70 percent of their employees. And the workers still employed have seen pay and benefits slashed.
A lack of work means more subcontractors are bidding for fewer jobs, said Liesel Cooper, president of KB Home’s Arizona division
“You’ve got to worry you’re (not) going to put the subs out of business,” she said.
Mark Swain of DePinho Roofing in Orange said that he’s seen competitors submit bids that were below his company’s direct costs.
“We’ve reacted to the market,” Swain said. “We’ve seen that our competitors have lowered their labor rates, and we’ve done to same to stay competitive.”
Hammer-and-nail types aren’t the only ones affected.
John Hogan, CEO for the engineering and planning firm Hall and Foreman of Tustin, noted that architects, engineers, planners, designers and landscapers all have felt the pressure to get prices down.
Hogan said that during the building boom, builders focused on schedule; price was secondary. Since then, however, the emphasis has been increasingly on price cuts.
To deal with a 75 percent drop in revenue, Hall and Foreman has laid off about half its workers, closed two of its six offices, diversified beyond homebuilding and foregone all fee hikes for five years.
“We have pared down our costs,” Hogan said.
Scott McKernan, president of Joseph Holt Plastering in Corona, said his goal has been to keep his profit margin around 7 or 8 percent after cutting prices by as much as 28 percent.
“I’ve been lucky to get 3 percent (in profits),” McKernan said. “This year, I won’t get any.”
Subcontractors had to do more than cut pay and reduce profits. They’ve had to examine their entire company structure, some said.
Those who have survived the downturn say they’ve learned to be more efficient by doing more up-front planning, closely watching schedules and reducing the time it takes to finish a job. Sophisticated subcontractors keep a close eye on their costs before submitting a bid.
But cuts in labor remain the key element.
Company matches for 401(k) retirement plans have been “suspended.” Employers no longer pay 100 percent of health insurance costs.
And in some cases, hourly wages have been shifted to “piece work” rates, under which workers get paid for the amount of work completed, not the hours worked.
“A typical laborer used to make between $150 and $180 a day,” observed McKernan. “Now (he or she is) making $60. Yeah, it’s sad.”
Builders note that they haven’t gotten much relief from government impact fees and other development charges.
Scott Stowell, chief operating officer for Standard Pacific Homes of Irvine, said that when all the costs of homebuilding are taken into account, “we’re just above break-even on a net basis.”
But homebuilders have benefited from more than construction cost savings. Falling land prices, government tax benefits and staff cutbacks in their own shops all have helped them boost margins lately.
Price drops for materials like lumber and drywall have helped some, but not much, industry officials say. And there have been reports that drywall costs could rise as much as 25 percent in coming months.
Costs for nails have doubled thanks to rising steel prices.
Ganahl Lumber’s purchasing Vice President Pete Meichtry says that overall material costs are down – at best – 5 to 10 percent.
Builders got more benefits by designing smaller, more economical homes, he said.
For example, builders may use 2.5-inch or 3.5-inch baseboard molding instead of four-inch strips. Or they build a straight-forward ridge instead of a more elaborate – and more costly – hip roof. Windows have shrunk by about 10 percent. These changes are subtle, but add up to big savings.
“It’s a combination of things,” Meichtry said. “The customer’s going to get a little less than he was a few years ago, but is not going to notice it.”
From > Builder Online