Featured Story / january 2016

It’s all in the Cards for 2016

By Tracy Dickinson

Local home builders give their perspectives on the coming year.

There’s something about beginning a new year that makes us all want to reevaluate our lives, our work, and our future. The start of a brand new year seems like the perfect time to start fresh or just to begin planning ahead.

We asked several area home builders to give their predictions about the coming year. Our interviews focused on four key areas: labor, land, material, and financing. Here are some of the issues we discussed:

Labor: Shortages throughout the construction industry have been a concern for the past several years. How will that play out this next year? And how is the industry working to resolve the situation?
Land: The supply of available land within the metro has been declining, and the price of available lots in surrounding areas continues to rise. How are cities working to make development more accessible? Or are regulations making development more difficult than necessary?
Material: Since the downturn in the construction industry, many manufacturers cut back production, and some sectors have not returned to pre-2008 levels. How is availability of materials affecting construction schedules and budgets?
Financing: Interest rates are expected to increase in 2016 after several years of record low rates. How will this affect construction financing or home sales? How much is the mortgage market a factor to local home builders?

Read on to find out what some experienced local home builders and developers see in the cards for 2016.

Kevin Johnson, Accurate Development

Labor
“The labor shortage is a concern in every facet of the industry, from skilled trades on down to just hands-on laborers,” Johnson says. Although he believes the shortage has remained fairly level for the past year, he says the plumbing and HVAC trades seem to be the hardest hit, in part because of the lengthy apprenticeship system.

“The skills and education necessary for those trades are much higher than for some others,” he explains. “And that’s important, but it’s also a hindrance. Guys have to spend so much time at that helper level, it can get discouraging when they’re not making as much money as others in the field.”

Johnson says evaluating the apprentice programs in those skilled trades would help improve the labor situation, but he echoes the view of many in the industry: The root cause is an underlying attitude in society about the trades.

“Fewer and fewer people want to do the actual work. A lot of people are willing to sit at a desk and do the management, but they don’t really want to get out on the job and get dirty. You have to do that part if you ever want to be the manager. And you have to be willing to go get dirty when you are the manager, too,” he says.
Land
Johnson hasn’t seen a real shortage in land availability and doesn’t anticipate one for 2016. “We develop our own land,” he explains. “And we have enough lots to keep us busy for quite a while at this point.”

Accurate develops ground primarily in Urbandale, where the company is able to buy enough acreage to do a full community with an overall master plan, creating a lifestyle and not just a development. “That’s become our niche, with most of our homes at the executive level,” he says.

Because Accurate builds at a higher price point on land it has developed, lot prices and availability have not been a factor for the company and will not be a concern for the coming year.
Materials
“The order time on a lot of materials has gotten a lot longer,” Johnson says. “And that’s still going to be an issue this year.” Suppliers that used to stock popular items, from flooring to siding and plumbing and lighting fixtures to cabinetry, are keeping less in stock since the economic downturn, according to Johnson.

“Things that used to have a lead time of two weeks typically take five weeks,” he explains. “And if there are changes during construction, it really affects our ability to stay on schedule.” Because of that situation, Johnson says Accurate has to maintain regular, detailed communication with clients in order to avoid added costs and delays.
Financing
As with other developers, Accurate has never seen financing as an issue with its clients.

“Our homeowners are not first-time buyers,” Johnson says. “So by the time they meet with us, they have their ducks in a row and have the resources necessary.”

He says a variation of three to four points in the interest rate doesn’t typically affect whether potential clients will be able to buy an Accurate Development home, so the anticipated rise in interest rates for 2016 is not expected to affect the work load.

“We primarily do built-to-order, not spec homes,” he adds. “Our long-term relationship with our lenders has allowed us to continue to get the construction financing we need, even when the market is fluctuating a bit.”

Kevin Johnson, President, Accurate Development. For nearly 25 years, Kevin Johnson has been building quality homes in central Iowa. One of Builder magazine’s America’s Top Builder award winners and recipient of Iowa Realty’s Award for Excellence, Accurate Development takes pride in its reputation for high quality and fine craftsmanship.

Jim Byers, Happe Homes

Labor
The lack of sufficient skilled labor has been a growing concern, according to Byers. “It’s not just having enough skilled labor but enough in general. There just aren’t enough people willing to work, and it’s been a huge problem for our trade partners.”

In fact, Happe Homes recognizes that it’s deeper than just having the right number of employees and has been considering alternate ideas for resolving the issue.

“We’ve talked about sending letters to our homeowners that inform them of the current labor situation so they know it’s a factor in scheduling the completion of their new home,” Byers says. “The trades just haven’t recovered since the downturn, and we need to figure out ways to deal with it.”

He says increased costs are definitely a result of the situation, in part because employers are increasing pay to attract skilled workers. “It seems sometimes they’re just increasing pay without increasing the skill of their workforce.”

Training skilled workers takes time, and qualified laborers is an immediate need. So Happe Homes is testing a pilot program with its trade partners to help the process work more efficiently.

“The program uses Build Tools software for scheduling and documentation, and it maintains communication between the builder, the trade partners, and the homeowner. Our view is if we aren’t able to find more workers, we need everyone we have, at every level, to work more efficiently.”
Land
According to Byers, “Land is still accessible, but the demand has raised the price. There’s definitely a shortage of the lower-priced lots.”

One of the concerns for many in the real estate and construction fields is the lack of new construction homes under $250,000, virtually eliminating first-time and starter-home buyers from the market. “It’s nearly impossible to build a quality home for $200,000 if your lots costs are already over $30,000,” Byers says.

He says lower-priced lots can be made available. “You have to go farther out in order to get land at that price. But developers will if the market is there.”
Materials
“Product availability always fluctuates throughout the year,” Byers observes. “So we’re always having to adjust schedules for different lead times. But we’ve noticed issues that at times are more connected to personnel than to product availability.”

As sales staff moves from company to company, orders get held up and lead times aren’t always met. “We’ve seen delays in various areas because markets slowed down after 2008 and are still ramping back up. Some even shut down some plants. So we’ve had to adapt to that and will probably still see that over the next few years.”
Financing
As with many larger builders, Happe Homes hasn’t suffered as a result of changes in financing availability. “We try to work with everyone throughout the entire construction phase to avoid any unnecessary financing concerns or delays,” Byers says.

“And because we build more houses at the same general price level, we have less overhead. That allows us to be more efficient and more flexible as interest rates change.

“Because we’re constantly looking for ways to build and to run our business more efficiently, we don’t have to raise our prices every time the market fluctuates. We have more flexibility.”

Jim Byers, Operations Manager for Happe Homes. With a mission to be a preferred builder in central Iowa, Happe Homes seeks to build quality homes at a fair price. Its team of professionals has expertise in single-family, multi-family, and development, and is the only builder in Iowa featuring Control 4 Smart standard features in every home it builds.

Colin King, K&V Homes

Labor
“Our trade contractors and vendors continue to struggle with obtaining employees,” King says. As a result, building times and remodeling project schedules have to be longer.

“Stress continues to be a growing concern for all parties involved as we try to provide a quality product within a promised timeline” he says. “There are only so many hours in a day that we can devote to our work without sacrificing the time and attention that our families deserve from us.”

King sees an opportunity to address the situation at the high school level, aiming for a long-term change rather than a temporary fix. “Students should be encouraged to look at all career paths, not just in business and IT but also in the blue collar world,” he says.

“The trade schools and apprenticeship opportunities are there to offer a tremendous career opportunity not only financially but also for life skills that cannot be taught in a classroom.”
Land
King sees a number of issues at play in the cost and availability of lots for builders and homebuyers. “The price has escalated over the years, making it a challenge to build an affordable home on a lot that a potential homeowner is happy with.” He believes that part of the cause for those rising lot prices is increasing government regulation.

“Although created with good intention, government regulations have not been thought through. As a result, the cost to develop a piece of ground and construct new homes has grown exponentially over the past several years and continues to do so as we fight the current topsoil regulations.”

In order to address the inflated lot prices, King suggests more discussion needs to take place across the board.

“Round table discussions with credible participants need to happen over a longer span of time,” he believes. “Cost/benefit analysis needs to take into account the developer, builder, homeowner, city staff, and city budgets in order to enforce the regulations.”
Materials
According to King, the delays in materials are directly connected to the labor situation. “This is yet another area where the labor shortage has caused problems due to the production capability that results from fewer employees.” Because of longer lead times for production and the delivery of so many products and materials, schedules, and the entire construction process are negatively affected.

“Not only are lead times longer, but homeowners have less time to make their selections. They have to have everything finalized and ordered more quickly, and it’s still ultimately delivered late too often due to a lack of skilled workers at the manufacturer and drivers to deliver it.”
Financing
King doesn’t expect rising interest rates to be a factor in construction starts in 2016. “An increased interest rate is just another liability to consider when planning a project. Staying within budget is the most important facet of any residential project, and increased interest rates will indeed affect this.”

However, King says building within a realistic budget can always be achieved, no matter what the interest rates might be.

“They can still build or remodel, but it may not be the size, scope, or amenity selection they originally thought. Scaling back as opposed to not moving forward is what needs to be emphasized to homeowners.”

Colin King, CO-OWNER, K&V Homes. Named Builder of the Year by the HBA of Greater Des Moines several times, K&V Homes has also received numerous HomeShowExpo awards. Co-owners Colin King and Dean Vogel back that award-winning reputation with Master Builder designations, decades of experience, and a talented team of professionals.

Bill Kimberley, Kimberley Development

Labor
“The labor situation certainly hasn’t gotten any better,” Kimberley says. “It’s a serious problem.” Kimberley adds that rising prices from subcontractors are a direct result of the labor shortage.

“It’s just supply and demand. The subs have more work than they can handle, so they raise their prices, knowing builders will have to pay because there aren’t enough options out there.”

He says all the trades are struggling to find employees, but framers seem to be the worst, with skilled framers in “very, very short supply.”

According to him, “The underlying problem, and I don’t know that it will be corrected any time soon, is the value our society places on jobs that are good, hard-working jobs. Society has put college at the forefront, not hard work.”

Kimberley believes an ever-increasing affluence in the United States has led to a generation of young people unwilling to work, which is also affecting the labor shortage within the construction trades, as well as other industries.

“It even affects our immigration policies and perspectives,” he adds. “If Americans are not willing to do the work, we need to allow immigrants into the country who are willing to do the hard work.”
Land
Though Kimberley doesn’t see a dramatic shortage in available land, he says some communities are making it difficult for developers to build there.

“There are really two issues at play when it comes to development. First, some communities are placing so many demands on developers that it is extremely difficult to build affordable homes in those cities. And the second issue is that when times are good, farmland prices go up, which makes land more costly.”

Kimberley says there’s only so much a builder can do about rising land prices, but excessive regulations can be avoided. “The more regulations a city puts in place, the less likely builders are to work there,” he explains.

“Most of the time those regulations are based on a well-intentioned concept that doesn’t work in reality. City planners and legislators need to work with builders and developers to make rules and laws that protect but also encourage development.”
Materials

“It’s taking longer and longer to get materials from factories,” according to Kimberley. “A lot of them are not running at pre-downturn levels, so prices are up and production is down.”

As a result, Kimberley says, builders have to work harder at scheduling to coordinate long lead times with installation and construction crews.

“The real issue with scheduling is again labor,” he adds. “I have had houses framed, waiting for siding crews for up to two months. There just are not enough skilled—or even willing—workers available in a lot of these areas.”
Financing
Despite the anticipated interest rate hikes, Kimberley doesn’t see this as a factor in local home sales. “We haven’t really been affected by changes in the interest rates,” he says.

Kimberley Development homes are typically for move-up buyers. Those buyers usually have established credit histories, already own a home, and are not applying for first-time mortgages.

These factors, as well as Kimberley Development’s long history of home building, allow the company to adjust as the mortgage market changes.

Bill Kimberley, President, Kimberley Development. Voted Ankeny’s Best Builder 10 years and Favorite Home at the HomeShowExpo a record five times, Kimberley Development has earned a reputation as Greater Des Moines’ premier custom home builder for more than 38 years.

Jake Ried, Neighborhood Builders

Labor
“The big shortage we’d seen in the past few years isn’t the biggest issue as far as labor is concerned,” Ried says. “I think the real issue now is the way costs have increased.”

Because fewer skilled laborers are working, those available are able to charge more, which is affecting the price of homes as well.

“It’s helped us that we build a lot of homes and that we’ve used the same companies as subcontractors for years,” Ried adds.

“So many of the subs are just maxed out with the amount of work available that they’re dropping some of their smaller builders and working exclusively with the bigger companies.”

Ried also observes that the labor issue will continue to be a greater concern for the skilled trades in the coming year.

“The mechanical trades—electricians, plumbers, HVAC, even carpenters, those fields that require more education and specialty training—are the ones that will continue to have the hardest time finding employees.”
Land
“Because we have a number of lots in inventory, land availability is less of an issue for us,” Ried says. He adds that the price of land continues to rise and will be an ongoing factor in 2016.

“That’s especially true of specialty lots, like infill lots within city limits. Those are very limited now, and the inventory is seriously depleted, so people who want to build in town will have a very tough time finding a lot.”
Materials
Whatever the reason, Ried says lead times on materials are more of a factor in scheduling than ever. “It has really gotten to the point where you can’t even be sure of the lead time the manufacturer gives to you,” he adds. “It’s almost double what they estimate sometimes because the production isn’t up to the demand.”

He sees this as even more of an issue with large orders and commercial projects. “Large orders can cause a backup in production, so if you place a large order, you’re waiting. And if you’re behind with a large order, you’re waiting. It’s just a lot more common than it used to be.”
Financing
Ried says the financing options and mortgage products themselves are not having an effect on construction loans or funds availability, but regulations are always a factor and can be hard to always plan for.

“There are new regulations every quarter, but as new ones come along, others are dropping off. So it isn’t the number of regulations so much as it is the regulations themselves. The new ones coming into play are to cover problems from years ago, and some of these are overreactions.”

For example, Ried says one of the new standards requires a new home to sit unoccupied for 10 days after completion to allow adequate time for the appraisal phase.

“I don’t know about other builders, but I’m guessing none of them have that much wiggle room in their schedule to let a house just sit for 10 days. That means the closing gets pushed back, the construction loan has to be extended, and the price of the house ultimately has to go up.”

Despite these issues, Ried says the construction business is still steadily increasing. “You have to be thoughtful and diligent. You can’t just dive in at any stage. You have to be organized and aware of the details through every phase of the process if you’re going to be able to deal with lead times, over-scheduled crews, and new regulations.”

Jake Ried, owner, Neighborhood Builders. Twice awarded the HomeShowExpo “People’s Choice” award, Neighborhood Builders has been designing and building in central Iowa since 2006. Neighborhood Builders is known for building homes as unique as the homeowners who live there, each one an individual project and not a cookie-cutter house.

Tom Stevens, TS Construction

Labor
Stevens says the area most affected by the labor shortage is the framing trade. “Framers and general laborers are suffering the most,” he says. “And delays in that area are pushing everybody back throughout the entire construction schedule.”

In order to adjust for the labor shortage in the coming year, Stevens says builders will have to schedule further and further out. “One little thing, one change, can make it almost impossible to stay on schedule and within budget,” he says. “It’s going to be all about communication and good planning.”

At TS Construction, they’re trying to gauge those varying schedules well in advance to prevent delays and added costs, which means keeping good communication with trades, suppliers, and crews throughout the build.
Land
Stevens says most of his firm’s clients come with a lot already purchased. However, he acknowledges that it is getting harder and harder for home buyers to find affordable land.

“Lot prices keep going up,” he says. “These days, I don’t think you can build a house, not a good-quality house, for $200,000 anymore with lot prices the way they are.”

He adds that this is one reason new-home prices continue to rise as well. “We typically build at the middle to upper end of new-home prices,” he says. But he believes builders trying to reach that under-$250,000 buyer will struggle as lot prices escalate.
Materials
“I don’t see the availability of products changing any time soon,” Stevens says. “After the downturn, a lot of factories went to one plant from multiple plants, and many don’t plan to expand back to pre-downturn capacity. They’re playing safer now.”

Because of this, lead times are much greater, and builders must adapt in order to maintain schedules and keep home buyers satisfied.

“We try to do everything well ahead in order to avoid delays and surprises,” he says. “With the longer lead times we’re facing, that’s even more important.”
Stevens says he provides home buyers with a list of decisions to be made, indicating the most important selections and the items with the longest required lead times.

“I remind them often to get those choices made to keep the process moving. By prioritizing those decisions and staying on track, it’s easier to avoid problems later.”
Financing
Although Stevens says he expects interest rates to rise in the upcoming year, he doesn’t see it as an issue for most builders. “Slight fluctuations in the interest rate don’t typically affect builders to a large degree in their business,” he says.

“I find by the time potential clients are ready to start building, they have their financing already in order and probably locked in, and those small changes in the interest rates won’t alter their decision to do that.”

In fact, Stevens says the threat of rising interest rates could even have a positive effect for some looking to build new homes. “In some ways, the changing interest rate will likely free up more people to build.

People realize that rates are never going to be this low again, so a slight increase or the prospect of continued increases is more likely to motivate them to go ahead if they’ve been sitting on the fence about it.”

Tom Stevens, owner, TS Construction. Tom Stevens, one of the few builders in Iowa to achieve Graduate Master Builder status, began his construction career as a framing contractor. The TS Construction belief that each detail is as important as the next has resulted in Builder of the Year recognition twice.