Market Intelligence Webinar: August 2021

Abridged Webinar Transcript

Hello, and thank you for joining our August Market Intelligence Webinar. I'm Mike Farmer, the President of Commercial Operations for Builders FirstSource. We're very excited to have you here today, and we've got a great agenda that we're going to talk through here and over the next hour. This year, it has become more evident that we need to continue to do more pre-planning in the build cycle and that's one of the biggest things we're talking to customers about, and we're going to talk a little bit more about on this call is, the more data and information we can have and the more timely information we can have from our customers and vendors, we can help make sure that we are keeping the building process moving as smoothly as possible.

A couple of things that we've seen is a continued increase in our READY-FRAME^® product and wall panels and components. And we think that's a great area to look at as well here to cut labor off the job site and continue to improve efficiencies. Now I'd like to hand it over to Jessica Ehrlichmann, the Senior Director of Strategic Sourcing and Sustainability from Andersen.

Before that, I'd just like to say thank you to Andersen for being such a great partner and for sponsoring this call. Great, thank you and hello to everybody. As an industry leader, Andersen has uniquely strong supply partnerships that have really allowed us to build a level of supply chain resiliency, helping us to resolve many of the critical issues across the Andersen enterprise.

Many of those you all, I know are also facing, and we know these challenges will persist in our current climate. That's really why our Andersen team continue to work tirelessly with our key supply partners, doing everything we can to resolve today's most pressing needs. The goal has been and is to constantly work to optimize the complete supply chain, the integrated supply chain. To create the most efficiency and effectivity in that overall order plan source make and deliver.

Today, I wanted to share just a few strategies that we've employed within the Andersen enterprise to optimize our source of supply and manage a supply chain that we know remains fragile. This has meant optimization that only with the individual functions, but really we're focusing on excellence in the handoffs between product process and information between those functions.

You know, first up Andersen has a dedicated team who's been working daily on identifying and prioritizing needs, allowing us to be swift and agile in addressing supply challenges. It says included, leveraging our strong R and D team who's diligently evaluating supply substitutions, ensuring our products deliver our high-performance requirements.

We've also been very disciplined in executing our SNOP processes. These have been critical to deliver accurate demand planning and frequent sharing with our supply partners. We know that evaluating that information is the right information and in the right format for those strategic suppliers is critical.

Once we have that clear understanding of demand and availability of supply of raw materials, that has really allowed us to respond in a way that has made our team members required to engage in multiple tier supply chains. This has helped us mitigate backorder impacts while also assessing longer-term supply risk and supplier capabilities.

In spite of the multi-tiered support, baseline capacity of supply manufacturers and systems is being exceeded. It has required some extended lead times across our product lines when certain features and options have been specified by our customers. This is really where the Andersen portfolio flexibility comes into play.

It's been critical for us to leverage that portfolio flexibility, to fulfill customer requests through an access to a range of products. The ability to flex the aesthetic and positioning within product hierarchy has been critical to continuing to deliver on the customer needs while managing against the challenges of the supply chain.

With that, I'd like to turn it over to Ali Wolf.

So in case you're not familiar with who I am. I'm Ali Wolf. I am the Chief Economist for Zonda. There was awesome news that came out two weeks ago. It was the latest report on gross domestic product, better known as GDP. This is the broadest measure of the overall economy. The reason I'm saying this is awesome news, and some of us are maybe still celebrating today.

It's because the overall economy has not only made up to where we were before the pandemic, but we've exceeded those levels. And if you've seen any of the presentations I've done with BFS, the conversation is always about, we had really swift and aggressive actions from the Federal Reserve in Congress.

And when they were able to put all of this money into the system, they were able to drive growth in particular for some of the higher income individuals. Note that on this slide, I have economy in quotes. And that's because you have a couple of ways that you can look at the economy. Policy can certainly help drive gross domestic product, but it can't be as successful in terms of the overall labor market.

So, where we're standing today, 5.7 million fewer workers are working today compared to February of 2020. But boy, have we had a couple of good months of job growth. June and July, we were averaging over almost a million workers a month. And if we were to carry on that trend, it wouldn't take us just six more months for the labor picture to be 100% recovered. That's not our base case. That's not our forecast. We do think that there are some challenges and you heard Jeff and Steve talk about it earlier. There are just some challenges, finding qualified workers that's actually holding back the overall economy. But what's always important is looking at the makeup of jobs.

Leisure and hospitality has been the hardest hit sector remains the hardest hit sector and is adding a lot of jobs. We're seeing a lot of growth in that sector. That's perfect! Exactly what we want to see. When you look at construction, that's the second to last showing 11,000 growth. That includes residential and non-residential. Residential is obviously doing better than what you see on the nonresidential side.

And we're now 60,000 more workers today compared to February 2020. When I think is a little bit misleading about that stat is that makes it sound like we're flushed with workers and, you know, we're all happy because we have everyone that we need and we're not having to pay more money. We know that that's not the case.

So even though we are up, we also know that the housing market looks very different than it did in February 2020. I'll have some stats on that a little bit later. And so that's why that's not really telling us that we're back to full employment in our sector where I've actually exceeded to the point that we're now struggling to find some workers.

Here's my 30 seconds of the virus. Just take it, acknowledge that it is still a risk. The reason I want to highlight this, as I've seen it both from friends, I've had friends reach out and say, hey, I was planning on taking this trip and I've decided not to. I just don't feel comfortable with the virus where the virus is going, but I think more impactful I've had now a handful, I would say five different presentations that were supposed to be in person across the country that have all moved to virtual for the rest of this year. And for these presentations, the way I just think about it is, well, if I was going to go back to business travel, I would have had to pay for my flight. I would've had my rental car. There would have been parking vendors that got my money, restaurants, hotels, plus the conference. And so as all of those activities are not happening and they're going back to virtual that isn't necessarily a positive sign for that leisure hospitality sector, though know that at least historically when virus cases pick up, it's actually good for housing.

Because as people spend more time at home and as interest rates stay low, we at least last time tended to be the sector that was the beneficiary. As we look at the markets with the highest and lowest unemployment rates, I'll drop both of these in here, know that the national unemployment rate is 5.4%. So above where we were before the pandemic at about 3.5%, but geez, so much lower than when things got crazy and we were approaching a 15% unemployed. As I've mentioned before, and I'll keep saying it just because LA Las Vegas, New York, Chicago have a high unemployment rate relative to the national average, it does not mean their housing market is not performing just as well. In fact, Los Angeles and Las Vegas are some of the hottest housing markets across the county.

So, it's not as perfect or as easy to look at these numbers and draw a line to housing. It does tell you that there's a higher concentration in some of the leisure and hospitality, some of the service sector jobs in the markets, on the left markets and on the right. You can see, these are really kind of mind blowing numbers with Salt Lake City, Raleigh, Indianapolis, having such low unemployment rates right now.

The last thing I want to hit on, on the economy is what we've talked about with just some of the struggles on the labor front. The National Federation of Independent Businesses is a good source that I like to look at. They come out with a report every single month and they talk to small businesses about what are some of the struggles.

I'm sure, No one's surprised to see that 46% of small businesses said that they had jobs that they could not fill. And you have 26% of firms saying their single most important problem in today's economy is the quality of labor. So that 26% means 26% of firms. Last year, it was 19. We have to remember that we did have labor challenges before COVID, even though I guess year over year was still COVID, but we know that we had some trouble finding quality, quality workers in the home building space.

The survey high was 27. Again, we're 26% of firms. So, we're basically at the survey high, going back to the 1970’s. So, if it really feels like you've never seen these kinds of challenges before, that's probably because you haven't or you haven't at least seen them since the 1970’s. As a result, we have a record high number of companies that have needed to raise comps, the highest level going back to the seventies.

63% of companies are hiring or planning to hire. I think this is important because if you know that competition is there, or competition is going to increase, then it's really incumbent on all of us as leaders in the industry to step back and say, well, what is our company's mission? What does our company offer? What kind of benefits can we give? Maybe it's not just comps, maybe it's flexibility. Maybe it's culture. And so I do think there's a way that if we put some thought into that we can try to help solve it. I know that's so much easier said than done though.

Second most important problem that small businesses are saying taxes feel like enough said there. Third highest is inflation. Inflation was 1% of firms last year saying it was a problem. Now it's 13%. Survey high was 41%. But remember when the survey goes back to the seventies. So clearly that really high point was in the seventies. We're not facing that same kind of inflation environment, but we have had 47% of companies that have needed to raise their price. That's the highest level since 1981.

So as we look at the economy, I just want your takeaway to be, we've had excellent growth and the economy is in such a better place that I think most people expected, even just a handful of months ago. We do want to watch, and we're not going to pretend that we don't have some access to labor problems. That inflation is a risk that we're seeing and just watch the Delta variants and the reaction from consumers and business. So, with that aside, we know that housing remains one of the top sectors. One of the leading sectors in the overall economy. There have been a little bit of shifts and we need to acknowledge that and also put those shifts in perspective because they don't have to be alarmingly batter, alarmingly scary, because frankly they're not.

So I've started to theme the months of the housing market. In June, the theme was shifts. When we met with our clients, we were saying, hey, you know, we see that sales have gone down. We see that some communities are now taking a little bit longer to sell all of their homes. Or maybe there's a little bit of listings that are taking a price cut.

That's not home prices going down. That's just a listing. That's taking price cut. And there were a lot of builders. Our phones in June were just ringing and ringing. Cause there was a lot of concern. I would say the theme for July is relief. Relief that, yeah, things are a little bit slower. The fevers broke. We're not going 150 miles per hour. We're going 120. So it's a little bit different. But we still have the majority of builders that say demand is stronger than expected, is on track with expected, or is slower than expected, but not worrisome.

But the final thing I'll say just to really hit on this point of the shifts is that when Tim Sullivan and I, my coworker were doing a presentation in January. We basically said expect the first half of the year to be awesome. And we laid out the different reasons why we believe that. I'm not here to pat myself on the back about that, because I think all of us could have said the first half of 2021 was good. I get that. What we had said that was just watched that second half of 2021, because affordability will get stretched.

And as the vaccines get distributed, people will get distracted. We were very, very lucky that seasonality was notably absent in 2020. This year, we're falling back into a normal pattern. The phrase that we keep hearing across the country is normalization. Nothing freaky, nothing scary. It's just that we're not as feverish.

And that's what we want to see. We could not have continued to maintain that pace and had a healthy housing market. This is builders that are making their sales caps. We still have 85% of builders that are intentionally slowing their sales. This is one thing that's going to impact all of the sales numbers. And it's something that I met with the White House recently. They didn't even know there were any kind of sales caps going on.

So I think this is one of the underappreciated ways that the market is trying to control itself. It does become a little bit of a PR nightmare because some people think that it's just for profit margin reasons and a lot of cases it's really just to better align with production capacity.

But either way, we're seeing it start to trend in the other direction. Meaning in July, we now have 15% of builders that are taking contracts per usual. And we think July is the inflection point where each month now we're going to see more builders that are no longer doing severe sales caps, because in some cases, not every single home on allocation is selling anyways.

To wrap up the idea on the pending sales index. The year where your change is a number that I'm not keen on any more, just because of how weird last year was for the housing market. And in fact, we should expect to see some pretty negative numbers, some literally negative down year, over year numbers in the housing market throughout the rest of this year. That's because of inventory that's because of the sales cap in partly because of demand. I don't want to pretend that that hasn't slowed. It has a little. But then you want to look at the two-year change. To me, what I love about the two-year changes. It can show you markets that have been fundamentally altered over the past two years. That COVID has just been so good for them.

And in a lot of these markets on the left-hand side or the right-hand side, we're finding that they're the most active. And as they're the most active, they become the markets where getting your hands-on supply becomes even more competitive and even more of a struggle.

But you can see on the two-year list, you have some small markets, Port St. Lucie stocked in Naples, Sarasota. You have lots of Midwest markets, Cincinnati, Chicago, Columbus, Indianapolis, and then you even have big cities, which I think a lot of people would maybe be surprised by San Francisco, Miami, Los Angeles.

But then you look at that average sales rate. Again, this is one of the components of the pending sales index, but I just wanted to show you really what it looks like compared to 2019 with sales caps that were still outperforming those levels. Check out Phoenix though. Again, I think Phoenix is one of the markets that's going to tell us what some other markets will start to look like. Phoenix, almost too hot for its own good. Just running into some production capacity, running into a little bit of a price ceiling. And then frankly, just too much demand to match the overall inventory on the ground.

Which is why the next place I want to go in this discussion is to look at inventory. We had called a few months ago that we believed resell inventory was at or near bottom. We have seen it lift up from the bottom, but you can see, you barely can notice it going up in the most recent stats. We haven't seen a flood of new listings on the resale side, hit the market. We're still down about 45% year over year in terms of active listings were really hot markets. Dallas Orlando, Denver, Charlotte, Las Vegas, even more severe down between 50 and 60%.

Our expectation is that we do see more listings continue to hit the market. Some people are just getting enticed by how much they can sell their home for today. We just don't think we're going to snap back to those early 2020 levels, really anytime soon. On the new home side. We haven't seen that bottom yet for community counts, but our expectation is we will in the next, I'd say three to four months, start to see community count going back up.

And that's good because right now we've seen builders sell out of communities quicker than we can replace them. But as many of you know, Zonda has lot development data. We have vacant developed lots. We have lot under development. Vacant developed lots are at all-time lows, but lots under development have increased 14% year over year.

Which suggests in third quarter, fourth quarter, and then into the first and second of next year, you'll have more lots that will turn into vacant developed lots for builders to then start building on those. As we look at this and we've talked about the demand picture and the supply picture, the natural result really for the past 16 months has been that prices have gone up.

In July, that's where we've seen a little bit of a change. And I think the good news is we've started to see a little bit of consumer frustration at the same time. That some of the building materials have at least stopped going up so much. They're still elevated, but it's not this continual runaway on some of the prices. As a result of what we're seeing I think on the consumer side with 61% of builders now saying that they are seeing hesitancy from buyers as a result of that 26% of builders in July took no price increase. That is abnormal. We haven't seen that really since last year. I think that's good. I think that's a sign that the builders are listening to the customers and saying, okay, we are getting a little bit of resistance and we don't want to shoot ourselves in the foot.

We want to slow, tap the brakes a little bit, give people time to jump into the market. And even as you see the price increases that are happening. So obviously the inverse is 75% of builders are raising prices. We've seen the dollar amount shift to the left, meaning a lower dollar amount in terms of the total price increases.

The thing that you have to understand though, is the demographics are so good for housing and builders do know that they are sitting on a desirable product. So, while builders are raising the prices, in some markets and some of the hottest markets, positive net migration markets, you still have a very large share of the overall projects within the market that are raising prices.

In San Antonio, Houston, Dallas, Tampa, Riverside, you have 80% of all the projects in those areas raising prices up from between 40 and 50% this time, last year. So, what can people do? Because we know that there are some buyers that are hesitant, and you really have the option of you could live with friends and family, you can buy a home, you can rent a home. And the rental market has really taken a life of itself. It's fascinating to watch. We have a multifamily expert. Her name is Kimberly Biram and when Kimberly called me the other day. And she said, this is the hottest rental market I have seen in my 30- year career. She is scratching her head.

She said, this is crazy. Occupancy is 96.5% on a national basis. That's a lot higher than what you would expect. Normally you're thinking around a 95 is the level we've done some presentations where the occupancy levels above 97% approaching 98%. So, if we talk about a shortage of, for sale homes, you're also seeing a shortage of, for rent homes.

And the developers are taking notice. My same coworker, Kimberly, she has never been busier with requests that they want to build new multifamily communities. So, I bring this up for a couple of reasons: One is that that's going to now become competition that's competition for some of the materials and some of the workers as that starts to pick up. But two, is you kind of have people that don't really have a great option because when you look at the rent to own equation, it's not that easy of saying, oh, well obviously the math tilts to rent. Let's just go to the rental space. Because again, in some of your hotter markets and some of your migration markets, rents and Phoenix up almost 20% year over year. Vegas, Riverside, Tampa, look at that between 14 and 16%.

So, I think for a long time there was fear that the rental market was going to be the next shoe to drop. At least for Class A, that's not been the case. And even as you go down in class, you still have people if they get priced out of the, for sale market, they want to go to rental. So just fascinating watch for the competition on labor watch for the competition on supplies. I do think that will trend up as some of the deals that my coworkers working on start to come to life.

So then let's look a little bit more into the supply challenges and the troubles with building a home. And this is a slide that I think probably every time I've done a presentation with BFS, I've shown it. It's one of my favorites. I think it's good to track over time. And one of the points that I made to the White House is it's really easy to get frustrated with builders and say, just build more homes, but you saw from Jeff and Steve's presentation too, there are just capacity constraints. You're seeing that on the supply chain side, but you're definitely seeing that on the government side. Where government services are not to their own fault, they're understaffed too, but they're creating huge headaches in the building community where entitlements are getting delayed or permits are getting delayed or costs are going up.

Maybe not even the direct cost, but the fact that those delays are now taking longer for builders and developers to move forward. There's a financing and a time cost that that gets hit. Labor shortage. This has actually increased compared to last month. Now you have about 70% of builders that say that labor shortage is one of their big concerns.

They're watching 92% supply disruptions. Interestingly to me, I think we heard some talk earlier about some relief on the way. Right now, it's actually gone up a little bit over the past few months where builders say their supply disruptions have actually gotten a little bit worse. I don't have a slide on it, but I do want to mention that, that there has been an interesting shift where usually I talk about the top concerns from the builders and it's consistently been building material cost followed by building material availability, followed by affordability. That order has reshuffled. Now it's actually building material availability is number one. It's overtaking costs and even affordability has overtaken costs. So the building material cost is number three. Again, you see availability one, affordability two, and cost is number three.

Then as we look at the final big concern in the market is the land disruptions. Like I mentioned, there's a lot of land development underway. A lot of builders were really active. The concern that I've heard is not really the immediate term of lots, meaning the next six to 12 months. Its what lots are available and how much do you pay for the land? When you're trying to look out into 2023-2024.

The good news. And you heard this earlier in the presentation is what's happening on the lumber front. When we talk to builders about what's happening on the ground in June, very few, you had about 15% of builder have said they have felt any kind of relief. Looking at July, we're now at 50%. So, we've seen big relief on the builder side. I think it's a huge, just mental relief to, from it just going up, up, up every day to now seeing some of the reversing of those trends. But what this is doing. And I think this is a little bit unfortunate is that lumber became so trendy that you couldn't talk about housing without talking about lumber and everyday people that were not involved at all in housing knew what was going on with lumber.

Well, now, as lumber prices go down, those are the new headlines everyone's saying, oh, lumber prices are coming down. Consumers are reaching out to builders and saying, great, I see lumber prices are coming down, so home prices are coming down, aren’t they? And that's not the case, and that's very unlikely to be the case.

And I think that going back to the, the PR of the sales caps, this creates its own PR challenges. The builders start to become the villain in all of this because people think, oh, well, one of your costs is down in a big cost. So why are we not seeing lower price? And I think a lot of us on this call know the answers because other costs have gone up.

It's not that simple lumber, isn't the only building material. And one of the ones that I wanted to highlight is just looking at what we see for land. When we do look at the land costs, you can see, this is what do you estimate the change of the cost of land has been from last year to today, this was from our July survey.

You can see 20% of builders say that they think their land cost had gone up between 16 and 20%. You have another 14, another 9 that are saying between 21 and 30% plus in terms of the cost of land. And then we asked them to look forward based on the conversations that are happening based on some of the deals that we're working with, what do you expect it will be in the future? And you still just have a lot of builders that think that cost of land is going to go up. Something that's not as well reported because it's just harder to track land prices then it is to track lumber prices. But something that I really think we need to keep an eye on.

As we look at permits. And as we look at homes that are being built, we just pulled a selection of markets across the country, one to cover some different geographies. And you do see that permits are up in big markets and small markets ranging from and honestly I was a bit surprised to see San Francisco of 56%. But coming from when last year, San Francisco wasn't doing as well as it is today, UC Riverside, San Bernardino up 9%.

But I think more importantly, this is looking at a long list. You’ve got 25 of the top markets here by annual starts. And the way this is sorted is just Dallas, Houston, Central Florida, Phoenix, Atlanta are just your largest markets. They have enough land, they have relatively easy regulatory challenges. And so they're able to bring the homes to the market fairly quickly.

You can look at those growth rates. For the top five, between 14 and 33% in terms of total housing starts. Again, if you're operating in some of these markets that are at the top, you may be facing even more of the challenges that mentioned earlier. Maybe not as bad on the government side though, even in Texas, I hear that there are some big frustrations with what's happening on the city level.

Showing this just as a different putt, in case you wanted to see the areas that have changed the most. Not on the percentage basis, but just by the total number, you can see still Dallas and Houston, one and two, but then a little bit of a change where Atlanta's three, interestingly Southern California is four than Central Florida is number five. You can see how those annual changes in the total starts have just huge, huge growth rates.

This whole deck, makes sense based on this one slide, because of all of the different things that we're seeing on the labor front, on the supply chain front, on the land front, all come back to no one planning, no one having a crystal ball to know to plan for 35% growth, final thoughts, a few things I want to go through here.

The first is one that I find a little bit frustrating because you can't change some consumer's mind when they see something like this. So, the media really loves to take this single family home price, to income ratio and run with it. And there is no way to deny that this chart looks alarming and you can't.

We have a home price to income ratio that is above what we saw 2005, 2006, 2007. But, we are a monthly payment business. The difference is interest rates were 5-6% back then interest rates are 2-3% today. Home prices can go up if interest rates are low and we see that when you then cut the data differently, looking at the mortgage payment to income ratio, and you're looking at a completely different ball game, you're looking at a completely different story.

Now, let me make something clear. I don't think that our market has runway to get back to pre-2009 levels. I'm not saying, wow, we can get back to those levels we saw in 2005. I don't think that's the case. I do think we have a lot of things that have changed in the market. We have different lending standards. We have more money that we want to spend elsewhere. Just a lot of experiences that pull from where people are putting their money. Plus, just this heightened jitteriness about the markets. The great financial crisis is just too fresh for us to pretend that we can just go back to some of the ways that we were living before that.

I do think a recent example that we can look at is the peak that we saw at the end of 2018 and early 2019 when the market slowed market slowed. Market slowed because consumer confidence really got shaken and interest rates went up to 5%. So, you can see we're below that level that we were in the end of 2018.

We put in some hypothetical interest rates and said, okay, if interest rates got to 3.5% where would that put us if they got to 4%, where would that put us? The interesting thing is, I think a shift that we've seen in the market is that in the past 5% was the threshold that really crushed the housing market in 2018.

Now to get to the same place given where home prices have gone, it's 4%. So, we do have a little bit more sensitivity to interest rates than we have in the past. But I think all of us expected that given what we've seen with home prices. Now, if you've seen me present before you've seen this chart, I know it's back again.

The reason I want to show this though, is because I had an interview with a reporter recently that basically said, I know why housing was good in 2020, in hindsight, we all can point to all of the reasons why that's the case. But why is housing still good in 2021? And it was such an easy question to answer because you just pull this up. You look at our main buyer groups and you look at the reasons why we said housing was good in the first place.

There's the non COVID lifestyle changes, just getting married, having kids. That's always going to be there. You have the home equity. That's great. You have the stock market that's held up. You have the low interest rates that are still there. Fear of missing out increased savings, rising prices. All of these things are very big overall motivating factors for the buyers. Our top buyers remain: the move up buyer one, first time buyer two, and relocation three.

So I think as, as we do these presentations, I think I will dust this off every four to six months to make sure that those pillars of those motivations for home buyers today, hold. If we start to see some of them falter, then maybe you need to start changing your tune on the overall strength of the market.

As I wrap up with my starts, forecast, and my sales forecast, start is no different. We actually have not changed our starts forecasts from the last time we met, what I think is maybe a little bit odd to some of you is that we're performing under the year to date level.

Year to date, I think it's closer to 20 or see the 20 or 30% year to date year over year change. We're saying 13.4%. We do think some of that is there having some delays and starts there have been some builders that have kept their sales. There have been some increased challenges on the supply chain that's just impacting overall growth.

We could be under here for overall starts, but again, we're calling for 13.4%. On the sales side. What makes it a little bit interesting is how different our forecast is for overall sales growth versus starts. We're calling for 1.2% increase. The reason that's lower is really everything I talked about today.

When you have community count, that's operating low and you still do have 85% of builders that are capping sales demand could be there again. Yes, it's softened, but demand could be there, but you just can't hit the overall numbers that you would expect. So with that, Mike, I believe I am bringing you back in.

Thanks Everyone.

Yeah, thank you very much, Ali. A lot of great information in there really appreciate you.

Great. Well, thank you guys. That's very, very helpful. And hopefully you got some good information out of this call. We appreciate everybody spending some time here with us today and apologize a few minutes over.

Thank you. Thank you again for your partnership and we will look forward to talking to you again on our next call. Have a great day.