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How Are Supply Chain Issues Affecting Homebuilders?

By Matthew Frankel, CFP® – Jan 3, 2022 at 2:36PM

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The home building industry has quite a backlog; here's how supply chain disruptions have contributed to it.

Supply chain issues are affecting most consumer-facing businesses in the United States to one extent or another, so what about the homebuilding industry? In this Fool Live video clip, recorded on Dec. 15, editor Deidre Woollard asks Dream Finders Homes (DFH 0.68%) CEO Patrick Zalupski how these issues have affected the company's business in 2021.

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Deidre Woollard: You had mentioned earlier the supply chain issues, wondering how you're thinking about commodity costs in the future. Obviously, we're in a position of some inflation. Lumber prices went up last year and then went back down to more tolerable levels. What are you thinking about that as the future rolls on?

Patrick Zalupski: We got to navigate. We say as home builders, I've never seen a home builder take a price increase that they can't pass auditor customers. Home builders are really good at deflecting price increases until they feel they can pass it on it. Of course, shows in the margins where maybe you've got to acclimate a little bit for 30, 60, 90 days. If you just can't get to your point lumber, which was pretty painful last year. But we were able to pass every dollar of lumber, we were largely able to pass throughout to our customers. It's really bad that way since I've been in the industry for now 13 years which refiners.

I've seen the big guys do it for a long time, the Lennars (LEN 2.50%) the DR Hortons (DHI 2.58%), and now we're up the scale that we're able to do the same thing where we're just really good at not taking those price increases or you negotiate resale call take in 30, 60, 90 days, but I can't take it on this portion of the backlog. You see you really do try to navigate that with your trade partners. We look at it as partners because you're there together. A lot of these guys have been with us for 13 years since I started the company. They've grown their business from maybe one or two plumbing trucks and now they've got 10 or 15 or 20. You've got to have that relationship, we work together and we try to have a give and take. I think now they recognize that we've been able to pass through a lot of those costs to customers and so I would even suggest that a lot of the price increases are coming because they see the home builders raising their prices.

Woollard: That brings up an interesting point because prices have been going up. There is going to obviously be a limit at some point in terms of how much you can raise prices. But wondering what you're seeing in terms of that, are you looking at floor plans differently, trying to maybe shrink floor plans in some cases to align prices better and what our customers are looking for when it comes to floor plans size right now?

Zalupski: Yeah. A big focus of ours has always been we have a slogan, the best value at every price point. That means whether it's an entry level home or a multi-million-dollar customer, we will always want to deliver value to our customer. We think that's something that's universal that customers, whether you're a millionaire, you are just buying your first house, everybody wants to have value.

We really focus on that and so to your point, we've been shrinking the box a little bit. It hasn't come down surprisingly that much. You would have thought with affordability challenges, that might happen more. Maybe it's because rates are really low steel, so it's still relatively affordable. If rates start to go up, you may see customers. We don't think people just stop by homes if rates go up, we think they start to go to a smaller box or they may have to go to a different neighborhood that they wanted or maybe they don't get to do the wood flooring or the granite counter tops.

We're always thinking about how do we deliver value. Sometimes they may just be, Hey, we've got a great alternative product here that's at a lower price. We still think it delivers a great, durable home for you. But it may be a little bit more economical product. Maybe the features are a little bit less and then buyers can choose what they want to add into our design. We have a really robust design center. That way if we give them more of a vanilla box and a lot of cases, they can come in and upgrade whenever they want that meets their budget, it doesn't price them out.

Deidre Woollard has no position in any of the stocks mentioned. Matthew Frankel, CFP® owns Dream Finders Homes, Inc. The Motley Fool owns and recommends Dream Finders Homes, Inc. The Motley Fool has a disclosure policy.

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