Eye On Housing
Typically, one of the best-kept secrets in a private company is the share of total revenue that stays in the company after paying all operating costs and expenses. For a number of personal, business, or strategic reasons, that number – also known as net profit margin – tends to remain the purview of owner(s) and accountants. Despite these company-specific realities, however, industries have a strong interest in understanding aggregate levels of profitability and measures of financial stability over time. For this reason, the National Association of Home Builders periodically conducts the Builders’ Cost of Doing Business Study – a nationwide survey of single-family home building companies designed to produce profitability benchmarks for the industry.
The 2019 edition of the study shows that profit margins have continued to increase, reaching their highest point since 2006. On average, builders reported $16.4 million in revenue for fiscal year 2017, of which $13.3 million (81.0%) was spent on cost of sales (i.e. land costs, direct and indirect construction costs) and another $1.9 million (11.4%) on operating expenses (i.e. finance, S&M, G&A, and owner’s compensation). As a result, the industry average gross profit margin for 2017 was 19.0%, while the average net profit margin reached 7.6%.
The figure below puts these margins in historical perspective. In 2006, builders’ average gross margin stood at 20.8%. Then came a painful housing recession that drove it to 14.4% in 2008. Gross margins have recovered slowly but steadily since then, climbing to 15.3% in 2010, 17.4% in 2012, 18.9% in 2014, and most recently, 19.0% in 2017. Meanwhile, their average net profit margin sank from 7.7% in 2006 to -3.0% in 2008, got a pulse in 2010 (0.5%), and made significant gains in 2012 (4.9%), 2014 (6.4%), and in 2017 (7.6%) is essentially back to 2006 levels.
In terms of the balance sheet, single-family builders reported an average of $8.0 million in total assets for fiscal year 2017. Of that, $5.3 million (65.8%) was owed as either short- or long-term liabilities, and the remaining $2.7 million (34.2%) was owned free and clear by the builders.
Looking back shows that, on average, builders’ balance sheets have shrunk since 2006. That year, builders reported an average of $13.0 million in total assets. But by 2010, average assets had been cut in half, down to $6.2 million. In 2012 and 2014, assets regained some lost ground, up to $8.9 million and $9.2 million, respectively, before falling slightly again in 2017 ($8.0 million)
The figure below also shows that builders were highly leveraged in 2006: they had debts equivalent to 74% of their assets. As their balance sheets shrank over the next few years, their reliance on debt declined as well, bottoming out at 64% in 2012. Relying on relatively less debt to run their companies meant builders were using more of their own capital to do the job. In 2006, equity accounted for 26% of builders’ assets, but by 2012, it had jumped ten points to 36%. By 2017, the typical builder’s balance sheet showed liabilities and equity equivalent to 66% and 34% of assets, respectively.
The NAHB Economics team is currently conducting similar research for the residential remodeling industry. If that is the primary activity of your firm, we need your help. Without your input, we can’t produce benchmarks for residential remodelers. Please email Rose Quint to participate at rquint@nahb.org.
I was reviewing another of your articles:
https://eyeonhousing.org/2017/03/how-much-do-residential-remodelers-earn-in-a-year/
This article shows the national margin average as 28.9% for 2015. Seems like such a jump from this article showing 18.9% margin on 2014 and 19% margin in 2017.
Please explain as that is a little confusing to me. Thanks
Different parts of the industry – remodelers and builders.
Sorry to sadden you folks. I’m 70 this year and built homes back in the late 70’s and early 80’s.
My gross profit was 35% on everything.
My plumbing-HVAC-Ele service company had a 62% gross profit on everything.
My taxes will provide sufficient proof.
Don’t let anyone fool you.
Builders like all companies have huge ‘non productive personnel’ including the builders wife, son, son in law and all the fancy trucks and cars they want to buy and simply legally write it off against the business.
It’s a great business and is very profitable.
I learned to never build a home for a customer. I built all my home speculative and finished them out my way which was a general norm for colors and finishes. Dealing with a customer you are building a home for is like living in hell.
I sold a home to a VP of a Savings and Loan. He and his wife were not happy with the amount of money I offered them to use to buy new/replacement light fixtures after I finished the home and they saw it and wanted to enter into a purchase for it. I told them ‘sorry’, the amount I am offering is in excess of what I have already spend and is being offered as a gesture of good faith since they were in the finance industry for homes. They finally understood that you don’t play kick with a mule. Take the deal, it’s fair, the home is beautiful and well built.
I only built 8 to 12 homes a year and in the late 70’s they sold for $70k. The same home today in a resale market is listed at $375,000.00.
Go figure.
$70K to $375K (approx. 5X) since the late 70s is nothing! My childhood home from 1976 was purchased for $85K, now it’s worth $2.35M (27X)! My personal home I just sold for almost 5X, but we purchased it in 1997 not in the 70s – its sale price was 60X the original new price in 1963 (the equivalent of your $70K house selling for $4.2M 15 years from now).