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Profitability for single-family home builders reached the highest levels in more than a decade in 2023.  Industrywide profit benchmarks are important because they allow companies to compare their financial performance against the entire industry.  Doing so can guide resource allocation, budgeting, and target setting for costs and expense lines.  More broadly, understanding industry benchmarks can lead to an improved business strategy and to higher financial results. 

On average, builders reported $11.3 million in total revenue for fiscal year 2023.  Of that, about $9.0 million (79.3%) was spent on cost of sales (i.e., land, direct and indirect construction costs), which translates into an average gross profit margin of 20.7%.  Operating expenses (i.e., finance, S&M, G&A, and owner’s compensation) cost builders an average of $1.4 million (12.0% of revenue), leaving them with an average net profit margin of 8.7%.  This post summarizes the results from NAHB’s most recent edition of the Builders’ Cost of Doing Business Study.

Based on historical survey data (performed every three years), the 20.7% average gross profit margin in 2023 was the highest registered since 2006 (20.8%).  As a point of reference, builders’ gross margin sank to a record low of 14.4% in 2008 (i.e., during the housing recession), but bounced back steadily through 2017 (19.0%).  The onset of COVID-19 in 2020 increased costs, causing builders’ average gross margin to drop (18.2%) for the first time since 2008.

The 8.7% average net profit margin for fiscal year 2023 is the highest in this survey’s recent history, exceeding the 7.7% reported in 2006.  However, increased use of financial incentives, such as mortgage rate buydowns, and cuts in home prices are likely to have caused this margin to shrink in 2024.

The Cost of Doing Business Study also tracks builders’ balance sheets.  On average, builders reported $7.2 million in total assets on their 2023 balance sheets.  Of that, $4.5 million (62%) was financed by liabilities (either short- or long-term) and the other $2.7 million (38%) by equity builders held in their companies.

Historical data show the average $7.2 million in total assets in 2023 was 23% lower than in 2020 ($9.4 million), and builders’ lowest asset level since 2010 ($6.2 million).  But perhaps more important than fluctuations in the size of their balance sheets, the data reveal a long-term decline in builders’ reliance on debt to finance their operations: in 2006, 74% of their assets were backed up by debt; by 2020, the share was down 10 points to 64%; and by 2023, it dropped to a record low of 62%. Logically, the latter means builders are using more of their own capital to run their companies, as illustrated by their equity share rising from 26% of assets in 2006 to 38% in 2023.

The NAHB Economics team will conduct a Cost of Doing Business Study for residential remodelers in the spring of 2025. If that is your firm’s primary activity, please consider participating in this confidential survey. We simply can’t produce benchmarks without your input.  To participate, please complete this form. A summary of the most recent profitability benchmarks for residential remodelers is available in this blog post.

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This article was originally published by a eyeonhousing.org . Read the Original article here. .


Borrowers and lenders agreed that credit for residential Land Acquisition, Development & Construction (AD&C) tightened further in the fourth quarter of 2024, according to NAHB’s survey on AD&C Financing and the Federal Reserve’s survey of senior loan officers. The net easing index derived from the NAHB survey posted a reading of -16.3, while the similar index derived from the Fed survey posted a reading of -9.5 (the negative numbers indicating that credit tightened since the previous quarter). Although the additional net tightening in the fourth quarter was modest (as indicated by negative numbers much closer to 0 than -100), this marks the twelfth consecutive quarter during which both surveys reported net tightening of credit for AD&C.

According to the NAHB survey, the most common ways in which lenders tightened in the fourth quarter were by lowering the loan-to-value or loan-to-cost ratio (reported by 72% of builders and developers) and reducing the amount they are willing to lend (61%).  Additional information from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—is discussed in an earlier post.

For the second consecutive quarter, the contract interest rate declined on all four categories of loans tracked in the NAHB AD&C survey.  In the fourth quarter of 2024, the average contract interest rate declined from 8.50% in 2024 Q3 to 8.48% on loans for land acquisition, from 8.83% to 8.28% on loans for land development, from 8.54% to 8.34% on loans for speculative single-family construction, and from 8.11% to 7.75% on loans for pre-sold single-family construction.

In addition to the contract rate, initial points charged on the loans can be an important component of the overall cost of credit, especially for loans paid off as quickly as typical single-family construction loans. In the fourth quarter, trends on initial points were mixed. The average points declined on loans for land acquisition, from 0.77% in 2024 Q3 to 0.55%. However, average points increased quarter-over-quarter on loans for land development (from 0.68% to 0.75%), pre-sold single-family construction (from 0.26% to 0.67%) and speculative single-family construction (from 0.49% to 0.64%).

Not surprisingly, the conflicting trends described above resulted in mixed results for the overall cost of AD&C credit, as indicated by the average effective interest rate (which takes both the contract rate and initial points into account).  In the fourth quarter of 2024, the average effective rate declined  on loans for land acquisition from 11.17% in 2024 Q3 to 10.79%, and on loans on land development from 12.82% to 12.12%.  Meanwhile, the average effective rate increased on loans for speculative single-family construction from 12.61% to 12.86%, and on loans for pre-sold single-family construction from 12.03% to 12.98%. Even after these disparate changes between 2024 Q3 and 2024 Q4, the average effective interest rates on all four categories of AD&C loans were at least slightly lower in 2024 Q4 than they were in 2024 Q2.

More detail on credit conditions for residential builders and developers is available on NAHB’s AD&C Financing Survey web page.

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The most significant challenge builders faced in 2024 was high interest rates, as reported by 91% of builders in the latest NAHB/Wells Fargo Housing Market Index survey.  A smaller, albeit still significant share of 78% expect interest rates to remain a problem in 2025. The next four most serious issues builders faced in 2024 were rising inflation in the U.S. economy (80%), buyers expecting prices/interest rates to decline (77%), the cost/availability of developed lots (63%), and the cost/availability of labor (61%).  Builders don’t expect much improvement in these challenges in 2025, except for rising inflation, which ‘only’ 52% see as a serious problem in the year ahead.

In addition to those top tier challenges, 55% to 60% of builders also reported facing serious problems in 2024 with gridlock/uncertainty in Washington (60%), building material prices (57%), concern about employment/economic situation (55%), impact/hook-up/inspection and other fees (55%), and negative media reports making buyers cautious (55%). Looking ahead at 2025, significantly fewer builders expect gridlock/uncertainty in Washington (32%) or have concerns about the employment/economic situation (39%).  In contrast, more builders are expecting building material prices to be a problem in 2025 (64%) and about the same expect continuing problems with impact and other fees (58%).

Builders have been asked about their most serious challenges every year since 2011. High interest rates have been a problem for a negligible share of builders (under 10%) during most years, except for 2022 (66%), 2023 (90%), and 2024 (91%).  When first introduced to the survey in 2021, 63% of builders reported challenges with rising inflation in the U.S. economy, but the share grew to at least 80% in 2022, 2023, and 2024. Prior to 2022, relatively few builders reported problems with buyers expecting prices or interest rates to fall, but that share rose to 49% in 2022, 71% in 2023, and 77% in 2024.

The cost/availability of developed lots has been a serious challenge to most builders in nine of the 14 years of the series history. In 2022, 51% of builders faced this problem; by 2024, 63% did—tying a record high set in 2019. Meanwhile, more than half of builders have reported the cost/availability of labor as a serious problem for the past 11 years in a row. While 82% and 85% of builders faced this challenge in 2021 and 2022, respectively, the share has eased to 73% in 2023 and to 61% in 2024.

For additional details, including a complete history for each reported and expected problem listed in the survey, please consult the full survey report.

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In the third quarter of 2024, borrowers and lenders agreed, as they have over most of the past three years, that credit for residential Land Acquisition, Development & Construction (AD&C) tightened. On the borrower’s side, the net easing index from NAHB’s survey on AD&C Financing posted a reading of -12.0 (the negative number indicates credit was tighter than in the previous quarter). On the lender’s side, the comparable net easing index based on the Federal Reserve’s survey of senior loan officers posted a similar reading of -14.8.  Although the additional net tightening was relatively mild in the third quarter (as indicated by negative numbers that were smaller, in absolute terms, than they had been at any time since 2022 Q1), both surveys indicate that credit has tightened for eleven consecutive quarters—so credit for AD&C must now be significantly tighter than it was in 2021.   

According to  NAHB’s survey, the most common ways in which lenders tightened in the third quarter were by lowering the loan-to-value (or loan-to-cost) ratio, and requiring personal guarantees or collateral not related to the project—each reported by 61% of builders and developers. After those two, reducing the amount lenders are willing to lend was in the third place, with 56%.

Additional information from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—is discussed in an earlier post.

Although the availability of credit for residential AD&C was tighter in the third quarter, builders and developers finally got some relief from the elevated cost of credit that has prevailed recently. In the third quarter, the contract interest rate decreased on all four categories of AD&C loans tracked in the NAHB survey. The average rate declined from 9.28% in 2024 Q2 to 8.50% on loans for land acquisition, from 9.05% to 8.83% on loans for land development, from 8.98% to 8.54% on loans for speculative single-family construction, and from 8.55% to 8.11% on loans for pre-sold single-family construction.

More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.

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The majority of NAHB builder members are small businesses, according to the annual census of its members NAHB has been conducting since 2008. The most recent installment of the census was conducted at the end of 2023 and covered business activity through 2023.

The census shows that, on average, NAHB builders started 59.2 homes in 2023 (37.3 single-family and 21.9 multifamily). However, the median number of homes started was only six. Because the data include a small percentage of very large builders, the average number of starts is much higher than the median. For that reason, the median may better represent the experience of the typical NAHB builder.

Another, conventional way to evaluate the size of a business is by the annual revenue it generates. In the 2023 NAHB census, 14% of builders reported a dollar volume of less than $500,000, 12% reported between $500,000 and $999,999, 38% between $1.0 and $4.9 million, 15% between $5.0 and $9.9 million, 6% between $10.0 million and $14.9 million, and 14% reported $15.0 million or more. Only 1% reported no business activity at all in 2023. The median edged up to $3.4 million (from $3.3 million in 2021 and 2022). For comparison, the Small Business Administration’s size standards classify residential builders and remodelers as small if they have average annual receipts of $45.0 million or less ($34.0 million or less for land developers).

Historically, NAHB initiated the current version of its member census during the industry-wide downturn of 2008, when the median annual revenue of builder members was only around $1.0 million. Median annual revenue began rising in 2013, as the industry slowly recovered, plateauing at $2.6 to $2.7 million from 2017 through 2020, before jumping to $3.3 million in 2021 and 2022 and then edging up by another $0.1 million in 2023.

Due to their status as small businesses and extensive use of subcontractors, many builders carry relatively few employees on their payrolls. In NAHB’s 2023 census, builder members reported a median of six employees, including employees in both construction and non-construction jobs.

Whether based on the median of six employees, the median of six homes started, or the median annual revenue of $3.4 million, it is safe to conclude that the majority of NAHB’s builder members qualify as small businesses.

For more detail on the 2023 NAHB Builder Member Census, including a profile for each of the seven major categories of builder, please see the July 2024 Special Study.

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During the second quarter of 2024, credit for residential Land Acquisition, Development & Construction (AD&C) continued to tighten and became even more expensive for most types of loans, according to NAHB’s survey on AD&C Financing. The survey was conducted in July and asked specifically about financing conditions in the second quarter, predating the release of some relatively weak economic data that has raised prospects for monetary policy easing.

The net easing index derived from the survey posted a reading of -33.7 in the second quarter (the negative number indicating that credit was tighter than in the previous quarter). The comparable net easing index based on the Federal Reserve’s survey of senior loan officers posted a similar result, with a reading of -23.8—marking the tenth consecutive quarter of borrowers and lenders both reporting tightening credit conditions.

According to the NAHB survey, the most common ways in which lenders tightened in the second quarter were by reducing the amount they are willing to lend, and by lowering the loan-to-value (or loan-to-cost) ratio, each reported by 85% of builders and developers. After those two ways of tightening, three others tied for third place: increasing documentation, increasing the interest rate, and requiring personal guarantees or other collateral unrelated to the project, each reported by exactly half of the borrowers.

As is often the case, as credit becomes less available it also tends to become more expensive. In the second quarter, the contract interest rate increased on all four categories of AD&C loans tracked in the NAHB survey: from 8.40% in 2024 Q1 to 9.28% on loans for land acquisition, from 8.07% to 9.05% on loans for land development, from 8.24% to 8.98% on loans for speculative single-family construction, and from 8.38% to 8.55% on loans for pre-sold single-family construction.

In addition to the contract rate, initial points charged on the loans can be an important component of the overall cost of credit, especially for loans paid off as quickly as typical single-family construction loans. Trends on average initial points were mixed in the second quarter. The average charge on loans for land acquisition was unchanged at 0.88%. The average declined from 0.85% to 0.70% on loans for land development, and from 0.57% to 0.47% on loans for pre-sold single-family construction. On the other hand, on loans for speculative single-family construction, average initial points increased from 0.76% to 0.89%.

Irrespective of changes in points, increases in the underlying contract rate were sufficient to drive up the average effective interest rate (calculated taking both contract rate and initial points into account), on three of the four categories of AD&C loans in the second quarter. The average effective rate increased from 11.09% to 12.22% on loans for land acquisition, from 13.35% to 14.32% on loans for speculative single-family construction, and from 12.95% to 13.08% on loans for pre-sold single-family construction. Meanwhile, the average effective rate declined on loans for land development—from 13.10% in 2024 Q1 to 12.93%.

The average effective rates on loans for land acquisition and speculative single-family construction in the second quarter of 2024 were the highest they’ve been since NAHB began collecting the information in 2018. However, there’s a reasonable chance the situation will improve in the third and fourth quarters, as the Federal Reserve has begun signaling its intent to cut rates later this year.

More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.

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This article was originally published by a eyeonhousing.org . Read the Original article here. .

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