Homebuilder Update 2022: Flooring contractors and product manufacturers continue to navigate a turbulent builder market – May 2022
By Jessica Chevalier
The U.S. needs more homes. Realtor.com estimates that the U.S. “is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million.” Today, however, closing that gap isn’t just about getting the work done but about having the supplies and labor to do it.
Floor Focus reached out to discuss the current challenges of homebuilding and how floorcovering manufacturers and contractors have weathered the storm, speaking with Dennis Webb, vice president of Fulton Homes, and Andy Hogan, CEO of FEI Group, whose Home Solutions group of flooring contractors serves the homebuilding market.
According to Santo Torcivia of Market Insights, single family housing starts rose from 1,004,000 in 2020 to 1,111,000 in 2021 and are expected to inch up to 1,113,000 this year. The average new single-family home is about 2,500 square feet of floor space. Location-wise, homebuilding continues moving south and west, with states like New York losing population to Florida and the Carolinas, and California losing to Nevada, Arizona, and Texas. In 2021, the top states for homebuilding were Texas, Florida, California, North Carolina, Georgia, Arizona, South Carolina, Tennessee, Colorado and Washington.
Fulton Homes is a Phoenix, Arizona-based production builder with communities in Gilbert, Goodyear, Queen Creek, San Tan Valley and Surprise. Fulton built about 800 homes in 2021 and expects to do the same in 2022. It has 150 floorplans for buyers to choose from.
Unlike many builders, Fulton doesn’t have a land shortage. “We have plenty,” says Webb. “Our problem is finding the subcontractors to build and having the supplies to do it.”
The flooring industry will recognize the homebuilder’s plight with regard to being shorthanded. “The subcontractor population is aging,” said Webb. “We have Boomers who are framers and in their 50s now. They are leaving the industry, but they aren’t being replaced by younger folks. In addition, as an industry, homebuilders haven’t kept up with the technology part. Other industries have created ways to need fewer workers, but we haven’t. In fact, we need more now than we used to.”
On the supply side, the material shortage currently centers on windows, cabinets and stucco, which are used on all Fulton homes. Flooring, however, has been a supply bright spot, in part because Fulton took strategic action early. “On the flooring side, we have been fortunate,” says Webb. “Our manufacturers have been pretty responsive. We made a conscious effort a few years ago, when we saw the tariffs implemented, to move all our flooring supply from China-lots of ceramic tile-and to use American-made.” Fulton’s partners with North and Central American manufacturing, including Shaw and Mohawk, have continued to provide steady service.
On the hard surface side, which is taking share in the home, Webb reports that ceramic tile is still number one in volume for Fulton, but LVT continues to make gains. “We track things carefully,” reports Webb, “and the price of LVT is not cheap. We are running at about $10,000/house in LVT upgrades. We are less than that with our standard tiles. However, labor in tile has gotten stupid expensive; it’s more than the material cost. And, of course, plank tile is more expensive-more in material cost and to install-but if you are looking at our standard 18”x18” tile, there are lower price points than LVT.”
He continues, “I was concerned that LVT would be a trade-down from ceramic, but it hasn’t been, though it is a bit of a trade-down from plank ceramic tile, which averages $13,000/house as an upgrade.”
Webb reports that buyers like LVT because it has no grout, and the aesthetics are strong. The company has had some pushback on its policy to install quarter-round with LVT rather than baseboard, and it now offers baseboard for a charge. Webb reports that this produces a “much cleaner look.”
As for soft surface, which nets less square footage in the new home than it once did, generally limited to respite spaces, buyers have been opting for better-quality goods. On the hard surface side, Fulton offers three levels of upgrade. In soft surface, it has eight upgrade levels, and Webb reports that buyers are opting for luxury product in the main bedroom, especially.
However, he also notes a trend toward taking hard surface through the entire home, including the respite spaces.
Fulton’s buyers generally begin their home-buying journey with the Envision program, which allows them to study the floor plans and options available and get a price based on their options. The program also includes warranty information. “The average buyer will spend eight hours in program before they come in,” says Webb. “They come prepared.” With regard to finishes, flooring is-by far-the largest category and the most important. However, incorporating flooring into Envision posed a challenge because with 150 floor plans and the plethora of flooring options, the determination of pricing was impossible. “So, what we did was study where buyers were putting each flooring,” explains Webb. “We determined that 80% of buyers put hard surface in the standard areas-kitchen, bath, entry and laundry-and upgraded to hard surface in family room and hallways, so we created pricing including those upgrades as ‘suggested hard surface areas.’ Buyers love it because no one else is giving them pricing on flooring.”
But there’s another significant benefit as well. Webb reports that before Envision included information on floorcovering upgrade costs, customers were hit with sticker shock at their first sit-down. The “forewarning” sets their expectations and allows them to adjust their budgets accordingly. “That has been a really strong point for us and has helped flooring sales,” says Webb.
While the business of homebuilding has always had its ups and downs, Fulton does have concerns about the rapid increase in values happening right now and how that may price buyers out of the market. “Prices are going up every month,” says Webb. “A year ago, our cheapest house was $300,000; today, that same house is $450,000. Each price increase takes a certain number of people out of the market, as fewer qualify for the loans. In fact, half of our current buyers couldn’t quality to buy the house they are under escrow for now.”
He continues, “One thing that’s interesting in Phoenix is that, for the first time ever, existing homes sold for a higher price than new homes. The reason for that is that the new homebuyer locked in at a lower price while prices on existing homes continued escalating. Today, the people buying our houses are making more than we do. They have $125,000 in equity before they move in.”
Luckily for those buyers, the trends that began in the pandemic have continued, with a desire for balance between open and private space high on the list-more private space for home offices, workout spaces and homework with a great room for gatherings and family time. Lofts have also been a successful venture for Fulton. “We can add another 1,000 square feet to a house. It lives like a single-story but has the space of a two-story,” says Webb.
In 2021, investors purchased 16% of all homes and condominiums, new and existing combined, reports Torcivia. The goal of these investment purchases is to rent them out and/or flip them at an opportune time. Many of these investors were large mutual funds like Blackrock. Three-fourths of the homes purchased were single-family units, and the majority were mid-priced homes in selected growth metro areas with good schools. The top five metro areas with investor purchases were Atlanta, Georgia; Charlotte, North Carolina; Las Vegas, Nevada; Jacksonville, Florida; and Miami, Florida. Twenty-five percent or more of all homes purchased in these states were bought by investors.
FLOORING CONTRACTOR PERSPECTIVE
FEI Group’s Home Solutions group of flooring contractors completes between one quarter and one third of floorcovering installations in new U.S. homes, according to the group’s estimates. While 2020 was riddled with Covid-related challenges, Home Solutions members had a good year in 2021, though in 2022 they are finding some of the impacts of the pandemic lingering. One of those pandemic changes that has continued affecting the flooring contractor relates to the number of finishes offered by builders to buyers.
To simplify sourcing amid the supply shortages of the pandemic, many builders limited the number of models being offered as well as the finish package options. Of course, limited upgrade options mean limited opportunity for better margins and higher tickets for flooring contractors and manufacturers.
In addition, in many instances, the builder has off-loaded responsibilities onto the flooring contractor, expecting them to monitor progress in the field, coordinating the installation rather than simply being called in when it’s time for their work to begin. In other words, rather than being called by the builder and told to arrive the week of June 4 for the flooring install, flooring contractors are expected to visit the homes themselves to evaluate progress and determine when they should be on site to begin installation.
On the job, with so many construction materials in short supply, flooring contractors are often finding less-than-optimal conditions: windows not yet installed, islands not built, HVAC systems not yet operational. And, of course, with flooring as the last finish generally installed on a project and with timelines dragging weeks and months over their scheduled close, flooring contractors are under a great deal of pressure to get things done right and quickly. That means flooring contractors have to stand ready-with materials and laborers-for when a project is set to commence.
According to Hogan, “In 2019-the last year of normalcy-the cycle time for a flooring contractor sale was three to four months from when the purchase order was issued to when the flooring was installed. And the flooring contractor could rely on that. Now, it could be five months or seven months. The cycle times are out of control because builders are spending their time chasing product and managing price volatility.”
And these longer cycle times can be a double whammy with product pricing rising as rapidly as it is. A flooring contractor may receive a purchase order and lock in the price with the homebuilder, only to have the manufacturer raise the product material pricing one or more times before the flooring is actually installed. And the how and when of passing that cost along to the builder is not always a simple equation. “We learned in 2021 that if you try to nickel and dime a builder-between all the change orders, all the paperwork changes, all the admin changes-it isn’t worth it, and flooring contractors simply found it best to eat the expense until the next major increase, then pass them along at once,” says Hogan.
In addition, with the timeline of jobs iffy, flooring contractors must increase product stocking for longer periods, which consumes dollars and square footage. Explains Hogan, “In some cases, with the increases in inventory-carrying costs, the member will go to the builder and say, ‘I’m stocking this. Can you help me subsidize it?’” In some cases, builders will comply.
Despite all the volatility, builders still command and demand exceptional service, notes Hogan. “Because flooring is the last thing or one of the last things installed, the buyer and builder have already been pushed out months and are at their wit’s end.” In response to this, as builders come to flooring contractors looking for opportunities to cut cost, FEI advises Home Solutions members to push back, reminding the builder that they can only provide timely, top-notch service with high-quality and well-compensated crews and the liquidity to stock materials.
There is no doubt, however, that inflationary pressures are squeezing builders as well. “In January 2022, just about all builders took big hits to the tune of $10,000 to $15,000 per home,” says Hogan. “Prices have risen in all product categories, especially framing lumber, which started going up in Q4 2021 again. If a builder got dinged $15K, flooring increases were a minimal piece of that, so we tell members, ‘If your sales reps are calling on builders and are skittish about going in with an increase, [they should remember that] prices on all the materials that go into a home have gone up.’ Our mantra for 2022 is to regain the margin that we lost in 2021. We believe that the increase that builders took in January will happen again in May/June, and we’re thinking a third in September, equaling another $10,000 to $15,000 per home. With the volatility of home pricing and interest rates rising, we are starting to see some headwinds, but there is still a backlog of millions with no existing homes on the market.”
Hogan reports that flooring contractors are being spoiled by the minimal number of callbacks that they receive on LVT installations. Callbacks are a perennial struggle for flooring contractors, who install flooring in new homes only to have it scratched, dented or otherwise damaged by last-minute tasks in the space, such as the installation of appliances.
With the prices of new homes rising rapidly, today’s buyers may not be able to afford the flooring upgrades they once could. “If you get into $400,000 homes or half a million-dollar homes, you will find better goods, like upgraded carpet with some design,” says Hogan. “But at the entry level, it will be base; upgrades are where manufacturers and flooring contractors make better margins.” Hogan reports that the cost of an average entry-level home has risen from $275,000 a year ago to $350,000 today.
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