AMDHeadlines_DWM

Volume 12, Issue 5 - June 2011

AMD Headlines

Ka-ching!
Affordability Matters More than Ever
by George Kessel

Several decades ago, the auto industry began to downsize the size of an automobile. The big brutes of the ’60s and ’70s were replaced by aerodynamic, sleek models that were probably 25-percent less roomy. Why? Because it was cheaper to produce, provide improved performance with better gas mileage, and technology enhancements allow the smaller product to actually be safer for the occupants.

What’s that got to do with residential construction? Well, everything. It’s my belief that future product offerings will be smaller in size, use fewer upgrades (at least initially) and eventually will be more energy efficient.

"As lending standards tighten, the allowable monthly mortgage payment decreases. The answer for many will be smaller homes with fewer options. "

Smaller Homes, Fewer Upgrades
Due to higher commodity prices and, more importantly, wage and benefit increases, the cost to build a home is increasing. As lending standards tighten, the allowable monthly mortgage payment decreases. The answer for many will be smaller homes with fewer options.

Try financing a new construction loan for a 2,500-square-foot home nicely apportioned with wood-clad windows, wide wood base and casing, and solid interior wood doors that is located within the same subdivision as another home using builder-grade materials. In today’s market appraisers don’t take the improvements into consideration. The buyer is required to finance those improvements in their down payment. It’s too bad that quality and a better product are not recognized by financial institutions, but for now, that’s the way it is. Eventually, we will return to building a better product but not until appraisers switch to fair market valuations from their current CYA valuation methods. Quality will be rewarded as it should but only after the overhang of unsold and/or foreclosed homes is worked down.

Currently, cash only or significant down payment purchases are required when financing which constrain growth for the move-up market. This affects not only the size of a home but also higher-valued options contained within the home. This is why I differ from consensus opinion and believe that fewer upgrades rather than more upgrades will be used in these smaller homes for the next year or two.

It is sad, but we truly have become a debtor society. It also seems likely that tight lending standards will continue to play an important role in our ability to secure a mortgage. Lending standards will remain tight, appraised values low and down payment requirements will increase. By necessity, the size of the home and how it is appointed has been affected.

Technology and Capacity Will Evolve
Technology advancements will produce more energy-efficient homes without necessarily driving up the price of homes. Currently, at least in the Midwest, people definitely want more energy efficiencies. They are just unwilling to pay more. It is my belief that over time, good ole American ingenuity will continue to find a better solution at a more affordable price. Energy enhancements, although coming, will not be an overnight success.

With regard to capacity requirements, we are all struggling to find that optimal mix of service and cost. All channel entities: raw material suppliers, manufacturers, distributors, and builders, are operating at significantly reduced levels. In order to survive, we had to cut, trim, and bend wherever possible. Eventually, the supply channel will need capacity. The ability to add capacity is dependent upon such factors as facility size, machinery and equipment, capital and number of trained employees. The one channel attribute that has the largest lead time to develop, at least from the distributor prospective, is trained employees y

George Kessel serves as president and chief financial officer of Morgan-Wightman Supply Co., and also serves as AMD treasurer.