Inflation. Tariffs. Elevated interest rates. A tight labor market especially for skilled positions. These factors are combining to hamstring builders, contractors and the mortgage originators who work with them.
The Trump administration has proposed hefty tariffs on foreign goods and materials across the nation’s largest trading partners. While tariffs and duties have been changing on an almost daily basis, and the legality of these tariffs is still in question, it is reasonable to expect higher costs for materials used to build new housing for the foreseeable future.
These tariffs are likely to raise the cost of building materials significantly in the short and medium term. Items commonly used in construction will see higher prices, such as lumber from Canada or appliances from Mexico and even raw materials such as iron and steel from China. Expect these tariffs to both spur inflation and lower overall consumption, slowing the economy.
Given the magnitude of these tariffs, there is little question that housing will be more expensive to build and remodel in the coming months. Mortgage originators will want to understand how their builder and contractor partners can survive and even thrive in this environment.
For instance, builders and contractors can turn to U.S.-based companies. Fortunately, most of the materials used to build homes can be produced in the United States. Unfortunately for builders and contractors, an increase in demand for these materials will likely cause domestic production capacity to fail in meeting demand.
“Builders and contractors aiming to reduce costs while increasing efficiency will likely need to turn to automation.”
Worse, some materials may not be of the same quality as imported items. Think certain types of wood and stone that can’t be grown or quarried in the U.S. And some types of appliances are simply not manufactured domestically.
Another option is for builders and contractors to seek suppliers from lower-tariff countries. The European Union, for example, currently carries a much lower tariff rate than China. While the cost of production in Europe is certainly higher than what can be purchased in China, lower shipping costs and tariffs may make certain materials seem affordable relative to similar products from higher-tariffed countries. ⊲
Builders and contractors could pool together to place larger orders of some materials. Oftentimes, larger orders receive discounts, and if inflation begins to pick up again, having significant inventory on hand may allow a business to earn additional income on the upsell of products ordered in bulk.
Another option is vertical integration. Builders and contractors, especially larger companies, could consider producing certain vital materials or working with a local producer to form a small production plant to produce easily-manufactured staples.
Labor issues
Labor markets remain incredibly tight. This means that small businesses are struggling to find quality candidates at prices that they can afford. This is especially true for part-time and seasonal employees. This labor shortage would be exacerbated by any crackdown on the hiring of undocumented labor and the large-scale deportation of undocumented individuals.
The Pew Research Center estimates that approximately 15% of construction workers in the United States are unauthorized immigrants. A significant loss of workers could limit the ability of a small business to take on new jobs, while driving up the overall cost of labor, creating a difficult environment for contractors.
Given the tight labor market, builders and contractors should consider investing in new equipment, technologies and business processes that will allow them to operate with fewer employees. Upgrading equipment to reduce manual labor and installing software that can better manage jobs and inventory will allow contractors to do more with a smaller staff.
For a business’ most critical employees, consider offering additional perks such as flexible work hours, continuing education or opportunities for career advancement. Strong relationships and the ability to satisfy employees’ career goals can help retain critical personnel in tight labor markets.
Financing options
Before expanding services or opening new office space or facilities, builders and contractors should thoroughly test the market to determine demand and pricing power. They will need to be sure that sales will more than cover expenses.
This is where mortgage originators in their advisory capacity can be of best use to their builder partners. For builders and contractors, it is important to maintain multiple financing relationships. Banks have been pulling back from lending to small businesses, and builders and contractors may need to work with multiple lenders to gain access to the capital they need.
The equipment finance market has also been impacted by banks’ reduced willingness to lend, making it more difficult for contractors to finance their equipment purchases. If contractors are having trouble obtaining financing, they should speak to as many lenders as possible. If a business owner is seeking loans secured by real estate, mortgage brokers can help with this.
Vendors will often provide financing options to builders and contractors. Banks can always be an option, but there also are independent non-bank lenders that are willing to lend money quickly, although the latter often comes with higher rates.
Business owners should expect that borrowing money today will cost more than in years past. Savvy owners should calculate the cost of the financing to ensure that the product they are financing will net a profit.
Reducing costs
Builders and contractors aiming to reduce costs while increasing efficiency will likely need to turn to automation. These new technologies should allow businesses to operate with fewer employees and faster processes. That should allow for scalability.
Examples of how this can be accomplished include managing inventory through new software, using robotic tools for repetitive tasks inside warehouses or processing facilities. Artificial intelligence can be deployed so employees can access information and draft standard communication faster and more accurately. These efforts can save time and allow businesses to operate with fewer employees
If we are in fact entering a slowing economy, business owners need to be prepared. In uncertain times such as these, builders and contractors can weather a down market by managing expenses, being judicious with expansion and keeping sufficient cash on hand to manage potential cashflow issues. Businesses and contractors should work with both bank and non-bank lenders to understand what financing options they have available to them and reduce costs wherever possible.
