Builders’ profit margins are falling as their balance sheet grows, according to the latest National Association of Home Builders (NAHB) Builders’ Cost of Doing Business Study. The nationwide survey of single-family builders revealed profitability benchmarks for the home building industry.
The report explains that the financial performance of any company is directly linked to the industry environment in which it operates. The number and size of competitors, barriers to entry or exit, capital requirements, economies of scale, or the bargaining power of customers and suppliers all play a role in the potential profitability of a company. Therefore, NAHB evaluated company competitiveness by comparing financial performance against profitability benchmarks for the industry as a whole. This study summarizes the findings published in the 2022 edition of the study, which uses 2020 numbers.
Builders’ profits declined in 2020 for the first time since 2008. The average gross margin fell dramatically during the housing recession from 20% in 2006 to 14.4% in 2008. But profit margins rose steadily through 2017 (19%) before edging lower again in 2020 (18.2%). Builders’ average net margin plummeted between 2006 and 2008 (7.7% to -3%), then gradually increased in 2017 (7.6%) before slipping back down in 2020 (7%).
On average, builders reported $13.7 million in revenue for fiscal year 2020, of which $11.2 million (81.8%) was spent on cost of sales (i.e. land costs, direct and indirect construction costs) and another $1.5 million (11.2%) on operating expenses (i.e. finance, S&M, G&A, and owner’s compensation). As a result, builders averaged a gross profit of 18.2% and a net margin of 7%.
Yet, the report notes that it’s important to put these results into context, considering the circumstances and realities of the time. The year 2020 was not normal by any means for people or businesses as the COVID-19 pandemic engulfed people’s lives and the economy. Like many businesses throughout the world, builders were forced to temporarily shut down operations, reinvent processes to ensure safety, provide health training to workers, limit visits to model homes, and adapt to office staff working remotely.
Builders in 2020 also had to quickly learn how to navigate the uncertainties of supply-chain disruptions that made many building materials significantly costlier and unavailable on demand. Additionally, the industry’s chronic labor shortage worsened as fear of the virus spread among workers and subcontractors.
On average, builders reported $9.4 million in total assets on their 2020 balance sheet, of which $6.1 million (64%) was backed up by liabilities — either short- or long-term — and the other $3.4 million (36%) by equity builders held in their companies.
Builders’ balance sheets were overall larger in 2020 than at any time since 2006, showing an average of $13 million in assets. By 2010, that number was cut in half to $6.2 million. Assets gained some ground and fluctuated over the next few years before reaching $9.4 million in 2020, representing the highest point since 2006.
The NAHB Cost of Doing Business Study also shows builders’ reliance on debt to finance their operations has declined over the years. In 2006, builders’ had liabilities equivalent to 74% of their assets, and by 2020, that share dropped down to 64%. The latter means builders started using more of their own capital to run their companies, and as a result equity went from representing 26% of assets in 2006 to 36% in 2020.