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Focus on Home Builders: News From the NAHB Convention and Managing Direct Construction Costs

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Welcome to this special edition of FOCUS on Home Builders, a newsletter service RBG provides to our valued clients. This enews provides an update of the January National Association of Home Builders annual convention held recently in Orlando.
October 1, 2005

NEWS FROM THE NAHB CONVENTION

Welcome to this special edition of FOCUS on Home Builders, a newsletter service RBG provides to our valued clients. This enews provides an update of the January National Association of Home Builders annual convention held recently in Orlando. The mood continues to be upbeat. Judging by the over 105,000 people in attendance, this part of the economic world continues to thrive. The following is some information we hope you will find of interest:

Current "Crisis" Issue Facing The Industry

As we know here in the Midwest, the cost of raw materials escalated rapidly in 2004. NAHB estimates that raw material costs increased over 9.0% last year, which is the highest oneyear increase in history. This represents an approximate .5% increase in direct construction costs that many builders were forced to absorb as they were unable to adjust sales prices quickly enough.

Of particular concern to NAHB is the consolidation that is occurring in many of the "supplier industries." NAHB notes, for example, five concrete suppliers now provide materials for 80% of the industry. They further add that 35 states are now noting shortages in concrete. OSB board had some incredible increases in 2004 based primarily on a substantially over-inflated shipment (only 20 box cars) to Iraq.

"Lock-In" of certain material prices is becoming a rapidly declining practice in several areas of the country. These issues of rising material costs and industry consolidation have the Association devoting substantial resources to address in 2005.

From the Economists

We have now had a 14-year run of tremendous housing demand. In particular, the last 4 years have been record breaking. This run has defied all historic economic trends. In addition, home ownership rate is at an all time high.

2004 also marked the largest increase in history in new home sales price. Depending on which economists you believe, prices increased between 9 - 13% in 2004. In particular, the third quarter generated a more than 15% increase. Will this be sustained in 2005? - not likely, but there appears to be no "home price bubble" on the horizon.

Also, there is a concern being voiced by some that the market in recent years, fueled substantially by record low interest rates, has to some degree "stolen" from future sales. Homeowners have been able to "move up faster" to larger homes than previous generations. Therefore, the need to move will be less in future years. Sounds interesting, but who really knows. . .

Here's what the experts predict for 2005:

  • Long-term mortgage rates will continue to increase at a slow pace with rates expected to be at 6 1/4 - 6 3/8 by the end of the year. It is not expected to have a noticeable effect on home sales.
  • 2005 closings will not be at the 2004 record pace, but will likely decrease 3 - 4%. This still will be a very good year for the industry - by any standard.
  • 2006 will be very similar to 2005, although, may be down 1 - 2%.
  • Inflation will continue to be low at around 2%.
  • The availability of loans for construction activity is, and will continue to be, very strong and fertile in most, if not all, areas of the country.

From the Business Management Experts

Planning, planning, and more planning IS a leading indicator of a business's ultimate success or failure. A builder in Idaho noted, "Would you build a house without a plan?"

  • According to study by BYU of small volume home builders, only:
  • 12.3% have written business plans
  • 14.2% have operating budgets, and
  • 69.9% have no formal planning procedures.
  • Sad to say, but nearly 25% of those builders equate net income with working for wages.
  • Most companies make a mistake by investing in people - instead of investing in systems first.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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