Homebuilders Adopt a Prudent Strategy in 2021

Homebuilders are taking a new approach to growth in 2021. Tri Pointe Homes’ CEO Doug Bauer says the firm plans to take a more prudent approach to growth this year, a divergence from more aggressive growth strategies from past cycles. Tri Pointe is entering 2021 with a focus leveraging strengthening market fundamentals, financial returns and its re-branding initiative.

“While we are in a great position to leverage our size and scale and take advantage of solid market fundamentals, we continue to grow operations in a disciplined manner given the cyclical nature of our industry,” Bauer tells GlobeSt.com.

Bauer says it is a tactic that the company’s competitors are adopting a similar approach. “This prudent approach, which is favored by our competitors as well, is a departure from the “growth at all costs” operating strategies of previous cycles, and should result in a more rational, consistent operating environment over time,” he adds.

The strategic shift is driven by challenges brought on by the pandemic. While demand increased in the home buying market, homebuilders are facing challenges with rising construction costs. Lumber prices have increased consistently since March of last year, with temporary lulls. Prices continued to grow through December, up 20% to $650 per thousand board, according to data from Random Lengths and reported by the NAHB. From April to August, the price of lumber increased by 110% and hit an all-time high of $950 per thousand board in September.

In addition to construction costs, Bauer says that the industry is having trouble keeps up with demand and finding new developable sites for new developments. “The challenge we face as an industry is keeping up with demand and replenishing our lot supply,” says Bauer. “The success we’ve experienced on the demand front has resulted in bigger backlogs and increased pricing power. However, it has also resulted in lower backlog conversion rates and quicker community close-outs than we had originally anticipated.”

The solution? Increasing construction efficiency. Bauer says the industry is well positioned to overcome those obstacles, saying, “Fortunately, the industry is well equipped to handle these challenges thanks to an increased emphasis on building efficiencies and the availability of capital to reinvest in land acquisition and development.”