Rising costs: How to prepare for continued inflation with Bill Smithers

Zach Wojtowicz:

It’s “The Building Code.” I’m Zach Wojtowicz.

Charley Burtwistle:

And I’m Charley Burtwistle.

Zach Wojtowicz:

We’re back in the studio. And today we have the president of CBUSA, Bill Smithers.

Charley Burtwistle:

President of CBUSA and close friend, Bill Smithers.

Zach Wojtowicz:

That’s right. We actually just saw Bill last week for our big celebration here called BT Unite, quite the event. And we got to catch up with Bill, and he’s really excited to come on. So, I’m excited to see what he has to say about some important issues like inflation and what’s going to happen with the construction industry.

Charley Burtwistle:

Yeah, I mean CBUSA’s entire model is basically saving people money and being more efficient. So, definitely two things that I’m sure our listeners care about a ton. And Bill is a fantastic guy and great speaker as well. He’s actually been on the podcast before.

Zach Wojtowicz:

That’s right, returning member.

Charley Burtwistle:

Returning member.

Zach Wojtowicz:

“The Building Code” family.

Charley Burtwistle:

So, we have an elite group of people that have been on multiple times. So, you know this is going to be a good one.

Zach Wojtowicz:

That’s right. Let’s get him in here. Bill Smithers. Welcome to “The Building Code,” a Building Code veteran. You did an episode with Dan Houghton back on episode 117. Welcome back. We’re really excited that you would join us once again to talk a little bit about some of the things happening in construction today. Bill, how you doing? How you been since you were last on?

Bill Smithers:

Doing well. Hard to believe it was episode 117. That was a great one.

Zach Wojtowicz:

The best, obviously.

Charley Burtwistle:

And for the listeners that weren’t lucky enough to hear that episode, could you give maybe a brief intro who you are, your background, maybe a little bit about CBUSA.

Bill Smithers:

Sure. I’m Bill Smithers as y’all know. I’m an industry veteran. I’ve been in the industry for many, many years, probably longer than you all have been alive. I spent 10 years in the production world working for a company called Ryland Homes and ended my tenure there as a division president, went on to start a custom building operation in Virginia, which is the market where I live outside of DC and found out very quickly that transitioning from a very big going and blowing 500 unit a year operation to a company where we did 15 to 20 a year, our pricing was terrible. And that was kind of the Genesis of CBUSA and the reason that we put that together. We started working together, a group of custom builders in Northern Virginia, through our HBA with the belief that if we combined our buying power in the market, we could buy better.

And, in fact, we did, but everything we did was being done on a volunteer basis. So, I started CBUSA to carry the concept to markets around the country. And that was back in 2004, and we have grown significantly since then. We now have 650 members across 34 separate markets in the U.S. We basically bring together independent and custom builders at the local level to do what we had talked about doing at the outset to combine their buying power and leverage it in the marketplace. So, we collectively have 14,000 plus starts a year, about nine billion in combined revenue. And if you look at us on a national scale, the 650 members of CBUSA collectively would be the sixth largest builder in the U.S. So, that volume and that market presence is what we work with to make sure that independents can run their businesses better and buy like the big guys in the market.

Zach Wojtowicz:

That’s probably one of my favorite things about CBUSA working here at Buildertrend, like getting to know these guys. We’ve had Ryan on the podcast before. Charley’s worked really closely with you. A lot of the value, too, is just connecting builders and letting builders kind of understand how other builders run their business. And then on the outside of that, also saving money with a very important part of the construction process with making sure you have materials.

Bill Smithers:

Sure. And the objective we have of representing ourselves as one in the market is for the supply channel and manufacturers. A lot of those folks thought that wasn’t possible. That if you get a bunch of builders together, they couldn’t agree on the time of day, but we’ve proven with our way of going to business and our systems, that we can agree on specific things, particularly as it relates to the way we purchase in the market.

Charley Burtwistle:

Yeah. I know on my bucket list is to attend the CBUSA Power 30 Conference, where you bring in some of the best and brightest builders across the country.

Zach Wojtowicz:

We’re five minutes into the interview, and you’re already trying to get …

Charley Burtwistle:

I always like to make pitches for some free travel, but I do remember seeing, hearing talks and things like that. It is incredible. Obviously, the entire business model only works with the best and most efficient builders in the nation. If people are not agreeing on things or paying for things later, not paying at all, then it all comes crumbling down. So, the ability to work together and learn from each other, I think is a really, really cool concept.

Bill Smithers:

Sure. And it’s a select group. It’s not a fit for everyone. You have to be willing to buy into the concept that you don’t know everything, and that you can learn from your peers. And we’ve been able to prove that in market after market.

Charley Burtwistle:

So, you said you started CBUSA in 2004. Is that what you said?

Bill Smithers:

That’s right.

Charley Burtwistle:

Okay. So, obviously quite a bit of change, you got to experience ’08 and then you got to experience 2020, and now, obviously, you see some crazy inflation rates happening in the U.S. How do you kind of weather the course and maybe more recently, what sort of shifts are you seeing from these builders that you’re learning from and kind of the general consensus there?

Bill Smithers:

It’s an interesting question, Charley, because if you’ve been in any industry for a long time, and you’ve seen the peaks and valleys, it does tend to give you a different perspective. I know as we roll into our Power 30 Conference, which is in September for the record.

Charley Burtwistle:

I’ll mark my calendar.

Bill Smithers:

There’re going to be people in there that are some of our top performers that have never seen a downturn, and their perspective on what a bad market is different than folks that have been at it for a long time. So yeah, I mean, inflation is certainly impacting us. Everyone knows what’s happened with home prices and input prices and everything related to supply channel madness, but we still put it in perspective with where we are in the market and why we see so much opportunity. I mean, consensus now is that we will turn the corner into ’23, probably with 1.5, 1.6 million housing starts and probably about a million of those will be single family, which is our bread and butter. And we say, wow, that’s down whatever percent from what we thought it was going to be at the beginning of the year.

But if you look at numbers that we had during the big housing meltdown, I mean, we got down to, I think, 550,000 permits. So, in relative terms, it’s still a healthy market. Is it as robust as it was six or eight months ago? No, it’s certainly not. But the impact of inflation and some of the other key economic drivers that affect what builders do really are weighing that down. But it requires us as an industry and as individual companies to pivot, to make sure we’re taking advantage of where the opportunities are.

Charley Burtwistle:

Yeah. So, for the listeners that don’t know, I work on the Data Science team at Buildertrend.

Zach Wojtowicz:

Everybody knows.

Charley Burtwistle:

I work really closely with Bill, but one of my biggest pet peeves is people will be showing timeline charts of the housing starts in various, I mean, pick any metric out of the hat right now. And they’ll go back. They’ll show from 2018 or 2019, even 2020 to now, and say, oh, look how awful this is. We’re down so far. I’m like, go ahead and scroll that timeline back about …

Zach Wojtowicz:

Back it up.

Charley Burtwistle:

10 to 20 more years to put into perspective where we’re really at right now. So, hearing you confirm some of those findings feels good in the data soul.

Zach Wojtowicz:

Well, interestingly enough, too, we had a economist on our last episode, Ernie Goss, and we talked about this quite a bit. And he basically also put in perspective, like even during ’08, yes, a lot of businesses went out of business, but there were still houses being built. It’s not like we’re going to see the collapse of the construction industry. The builders with good principles, good foundations, good processes, good groups that they’re a part of, right, like CBUSA, it’s going to insulate you from those risks that ultimately lead to those situations that put businesses out.

Bill Smithers:

Yeah. I know we’ll have an opportunity to talk about it here during the podcast, but the way that you run your business and the way you focus on the basics of blocking and tackling serve you well when the market is going up, when the market’s going down, or the market is staying put. So, that still is a big part of our push. And the way that we work with our members is to make sure that they understand how they’re running their businesses and doing that as effectively as they can.

Charley Burtwistle:

The other really cool thing about CBUSA is you don’t only have the builder perspective, but you also work really, really close with material suppliers and vendors and manufacturers with your partnerships and preferred vendors and things like that. What’s the kind of general consensus on that side of the house? And is it difficult kind of being the middle man and wanting the best on both sides?

Bill Smithers:

It certainly, whenever you’re trying to bring different sides of a transaction together, obviously, there’s going to be some level of friction and opportunity for success or opportunity for things to go a little bit sideways. We do focus a lot on the wants and needs of the supply channel and the manufacturers that we work with because obviously they want to grow their market share not just across the board, but specifically with our network of independent builders. So, when we’re looking at the way that those relationships go, there’s been a lot of, we use the term in Buildertrend, as you know, transparency. So, transparency has really been a big factor for us and our manufacturers and our vendor partners, the people that we buy from directly. And understanding what’s coming at us, we can provide some of the data and the look over the headlights for these partners, so that they get a really good sense of what things are looking like for us as we’re preparing for putting foundations in the ground. And with our industry sector, we’re a difficult group to get data on.

I mean, our starts don’t always show up on the start reports. Most of the forecast and whatnot, and a lot of what the manufacturers will focus on is what’s happening with the national builders. So, for us to be able to weigh in on a monthly basis with starts forecasts and historical look back even just 30 days at the type of volume that we have done plus pairing that with kind of determining what percentage of wallet the manufacturers and vendors are getting from us. That just it makes them a lot more engaged with our members and much better able to put together programs that work for us.

Zach Wojtowicz:

So yeah, we kind of touched on this a little bit. I’m going to bring it back to currently the inflation rate is hovering just over 9%. What is the actual tangible effects that you’re seeing with the construction folks that you work with due to those price increases?

Bill Smithers:

Yeah, as you might imagine, it’s a mixed bag, but the bar has gone up significantly. It’s everyone in the industry and even outside of the industry knows what’s happened with core commodities like lumber and steel and whatnot. Lumber’s actually come back quite a bit from its highs. I mean, it was as high as $1,600 – $1,500 per 1,000 board feet down to around $600 today. But that’s still well above what you would think would be historical averages of trading between three and 500. So, I think that as we look forward and the way that we’ve adapted our operation is just with the understanding that we’ve essentially set a new baseline for where pricing is going to be in the future. And when you get as bad as $1,600 per 1,000 board feet, $600 looks pretty good.

If you’re looking at it from the other perspective and saying, well, I’m used to $400, well, yeah. It went up. But we’ve been able to pass those cost increases along to the consumer. And that’s why house prices have gone up. So, all boats have really gone up during the same time cycle. I think, as we look forward, the challenge is going to be with many of the material prices and the indices coming back in our direction, it’s how readily we can go and get some of that money back in terms of direct cost savings. And many times, people will look at a buying group, and us in particular and say, well, you guys helped us when the market was going up.

I would argue that one of the greatest benefits that we see with our network is we’re tracking it closely. And we help when the market is going down because the folks that we buy from, I mean, the old adage is fast up and slow down in terms of pricing. So, for us, we’re constantly keeping a bead on it. And when it’s appropriate for us to say, Hey, it’s time for a cost adjustment, we’re going after it.

Charley Burtwistle:

I love that. So, I think that’s a really, really cool perspective to have. And I’m sure a difficult one at times, because it’s not always fun to be the realist in the group and take a deep breath and say, well, this is where we’re at now. How are we going to move forward from here? So, you mentioned lumber prices coming down quite a bit from their all-time high. What other kind of materials are you seeing big price increases in and are they kind of following the same trends as lumber or are there some that are coming down a little more slowly than that?

Bill Smithers:

Yeah. There have been. I mean, two in particular that impact us quite a bit are concrete and drywall, and both of those have continued upward. And I think there’s going to be additional pressure as we go into ’23 on those two areas. And it’s not the huge biggest portion of what goes into the house, but concrete in particular, if it’s a big house, found full basement, basement slabs, hard scape that goes around the outside. There’s a lot of concrete that goes in there. And as concrete goes, that affects us and the commercial construction industry as well. So does drywall. So, those are a couple that are kind of going in the wrong direction. Some of the metal pricing, copper steel, those kind of things that definitely affect what we’re doing, they’ve been coming down. So, it’s not to exactly where it was pre-pandemic, but certainly getting better. But we’re constantly looking at those and the impact that they have on the things that we buy.

I mean, we’ve had changes in categories that most of us never think about like duct work where, I mean literally the ability to get the ducting that goes for the heating air conditioning systems that we put in was a huge challenge this year. And it’s probably going to continue into the first part of ’23. Things like 400 amp meter bases, you say, well, they’re out there, they’re everywhere. Well, for some reason you can’t get them. It’s very hard to do it. So, people are having to kind of do dual services where they put two, 200 amps in, that kind of thing, adapting to what the needs are. But I mean, y’all have seen it as well. The industry moves as it needs to move. And I mean, anyone that is surprised when they get a notification that our delivery timeframe is going to be pushed back a little bit has been living under a rock.

It’s kind of the expectation. Our perspective is that those things are all getting better. So, it’s not just the price piece, it’s the ability to get it and to have that dovetail with the schedule that you’ve put in place. Windows are a high spend area for high end homes. And I mean, we were 26 weeks for window deliveries out to a year for some of the real high-end products that were out there. That’s all gotten better. I think the ones that were at the 26 to 28 week timeframe are in the 14 to 16 week timeframe, still a long time, but that’s plenty of time for you to get everything you need to get done with the pre-planning of a project and getting things underway and having that still work with your schedule.

Zach Wojtowicz:

A little bird told us before we went on air that you were building a house. You have to be a contractor’s dream. You actually understand the delays. You’re like, ah, I get it. It’s fine. I know all the time, the windows 26 weeks, whatever, I get it.

Bill Smithers:

Well as someone that does this for a living, I think the fact that I’m going to build a house right now is a good indication that we’re in a much better place in the market. They were not popular conversations around the household for the past couple of years as to why we’re not starting, even though we’ve had the land for a while. So, I think things are looking better. We talked about it last week in a lot of our meetings. I mean, we see in the year ahead, really next two years, I think there are going to be more opportunities for us as builders and particularly as a buying group to do better in the market than we already have. And we’ve done really well. But when you’re trying to put together a deal with a manufacturer that’s over capacity, and you want to talk about getting preferred supply in a discount, it’s not a real easy conversation. So, we see that changing a little bit as capacity comes back into the manufacturing sector, and the housing market cools off just a little bit.

Charley Burtwistle:

Well, if we see a huge uptick in the market when we release this podcast episode, it’ll be because people are learning that Bill Smithers is building a house right now. And hopefully it changes.

Bill Smithers:

It’s a good time.

Charley Burtwistle:

Yeah. It changes home buyer sentiment. And we turn this thing around.

Zach Wojtowicz:

Get this thing out to the people.

Bill Smithers:

Right.

Zach Wojtowicz:

So, that’s kind of an area that we wanted to explore with you. Obviously, it’s a lagging indicator of how people at the sentiment and what people are looking about job starts, do you think there is concern with builders that homeowners are going to kind of back out of the market, wait a little bit longer, maybe go more remodel versus buy? I mean, are we going to see job starts slowly decline here over the next four to six months?

Bill Smithers:

I mean that’s the question that everybody wants the crystal ball for. I mean, for …

Zach Wojtowicz:

Charley and I are just we’re here to ask the questions, Bill. We want to know what you think.

Bill Smithers:

Yeah. The backlog is strong, as you all know. And as prices are getting better, that strengthens the kind of the margin that you have built into your backlog. We just don’t see demand going away. I mean, people want homes. It was interesting in, it was either July or June. I think it was July where housing starts, single family housing starts were down about 12%, but multifamily was up about the same amount. So, people need shelter. The preference is that if they can buy, they want to buy. Sure, we’re looking at interest rates that are way above where they were. I think November, we were consistently below 3%, and now we’re between five and six. So, is that a big percentage increase? It is. But I mean a five and a half percent interest rate on a 30 year mortgage is still a really good deal, particularly if inflation is high. So, having been in the industry for a long time, we sold and built houses at 14 – 16% interest rates.

Zach Wojtowicz:

I was just going to ask you when you were getting in the industry in the eighties, I mean, interest rates were as high as what? 18%?

Bill Smithers:

Yeah. I mean, it’s crazy. But there were competitive products that were put out there to kind of deal with what everyone saw as a peak in the interest rate world. You’re already seeing that now in the production world with adjustable rate mortgages and buy downs and that kind of thing. So, they’re still getting interest rates to be in, I’d say a comfortable and viable range, but every percentage point that goes up, it has a big impact on what your monthly payment is going to be for those that are focused on that. For us, the other key headwinds are the stock market matters to our sector of the market. Not all of our builders are in the high-end price ranges, but a lot of them are. And what’s happening with your investment portfolio and your 401k matters a lot to that crew sometimes more so than interest rates.

So, we definitely see that as some of the headwinds that we’re facing that combined with inflation and the individual factors that go into what’s driving up the price of everything. I mean, labor rates, who would’ve thought that we’d have fast food workers that are starting at 15 bucks an hour with signing bonuses? But when you’re paying what you’re paying for gas, everyone’s cost of living has gone up. So, it’s understandable. Nobody likes it, but it’s understandable.

Charley Burtwistle:

Yeah. I think we’re getting pretty close on time here, but we’d be remiss if we didn’t ask this question. We work, obviously, CBUSA and Buildertrend really, really closely together. A lot of your builders use Buildertrend and vice versa. Do you hear kind of a general sentiment? I feel like technology in the construction industry continues to grow and grow and grow. What sort of feedback have you heard from your builders about how a tech solution can help better plan their process, better manage their leads? What are you kind of hearing in that realm of things?

Bill Smithers:

Yeah. I mean, all aspects of running your business better, those are the things that are critical. I mentioned it before, regardless whether the market is going up down or are not moving at all. And I think both Buildertrend and CBUSA represent improvements in the way you run your business. I mean, there’s no secret that the best builders and the best run companies get the best pricing in the market. And oftentimes, they get the best customers and the best market share. And for what we look at, it’s all about controlling what you can control. And when your schedules are running smoothly and in sync with what you’re telling your trades and suppliers, and you’re issuing POS that are easy to understand, you’re delighting your customers because of the interaction you have with them through a tech platform.

Those are all things that really allow you to run your business better because our industry is just, there’s so much waste in what we do. And a lot of that happens in the way that we transact business with the vendors and suppliers that we work with. And you talk about a 9% inflation rate, that pales in comparison to what you’re throwing out in a dumpster or the cost of not being ready when a trade shows up and the impact that has on the next pricing that you get for them. So, anything that’s going to allow you to run your business better and technology is the key to that, we’ve been of that belief since we started our company. And I know you all have as well. That’s really the key because those tools are there. And there’s a changing of the guard that has gone on over the past 10 years.

I mentioned that there are a lot of folks that’ll be at Power 30 that have never seen a downturn. I mean, for them technology and the use of your phone to run your life and with Buildertrend, to be able to run your business, that’s real stuff. That’s not like, eh, we might switch to that. They’re like, no, we want that. We have to have that. And the customer expectation on the other side, dovetails with that completely. The days are gone of where customers are going to be satisfied, just going and finding something and then tracking someone down to get an answer to their question. We want to be ahead of them and really drive that experience for them so that they love the process, and they love what’s being delivered to them.

Zach Wojtowicz:

Love it, Bill. We are out of time. We could go for another 25 minutes, I think talking about this. Love your knowledge. You can just tell you are a true veteran of the industry. So, thank you for joining us at “The Building Code.” And you can join that illustrious third time on “The Building Code,” which I don’t know if we’ve ever had three timers. So, let’s make it happen.

Charley Burtwistle:

Three peat. Sounds good. Thanks a lot, Bill.

Bill Smithers:

Ready to go. Thank y’all very much.

Zach Wojtowicz:

We just had Bill here on “The Building Code,” Bill Smithers from CBUSA. Charley, what’d you think? You like the pause?

Charley Burtwistle:

Absolutely, I loved the pause and always …

Zach Wojtowicz:

You didn’t know what I was going to say.

Charley Burtwistle:

No. Well, I did know because you always ask me what I think right after interviews. Very …

Zach Wojtowicz:

Charley’s over here saying …

Charley Burtwistle:

Predictable in that.

Zach Wojtowicz:

I need to mix it up, I guess.

Charley Burtwistle:

No, Bill is great. I guess my biggest takeaway was he said he was going to get us out to Power 30 this year.

Zach Wojtowicz:

Yeah, said you.

Charley Burtwistle:

Yeah. Don’t mention to Zach.

Zach Wojtowicz:

Didn’t want the studio.

Charley Burtwistle:

No, I mean …

Zach Wojtowicz:

You’re due. You’re owed.

Charley Burtwistle:

Yeah, I try not to get my hopes up, but no, Bill is always great. I knew that it was going to be a good episode going into it. I thought it was a really, really refreshing perspective of the current kind of industry and state of the economy. I thought he’s approaching things with a really, really level mind and realist kind of attitude I’d say. And I stand by a lot of things. I said where a lot of times you just have to zoom out the X axis on your chart there, go back to 2000, go back to the 1980s. And he made the point multiple times. People need places to live. People want to live in houses.

And this is any down take in the economy is just an opportunity to grab market share, scale your business become more efficient, really dial in processes. So, I think a lot of times, people are pessimistic and there’s a lot of things to be scared about. You do have to pay attention to it, but if you approach it with the right mindset, a ton of opportunity for growth and to turn this into a positive, and I thought Bill did a good job of encompassing that perspective.

Zach Wojtowicz:

Yeah. It’s easy to be reactive and panicky and kind of listen to what’s happening. But if you know your processes are solid, you know that you’ve been planning for this. There’s a limited impact that’s going to have. And Ernie Goss talked about that a lot, too. It’s like, we’re still going to have businesses that are thriving. And a lot of it comes down to having the systems to support what you’re doing and making sure you’re being conservative with your projections and then going out there and get it and beating them.

Charley Burtwistle:

Yeah. And so, Zach mentioned, we had our quarterly town hall BT Unite last week, and our CEO, Dan Houghton, who I’m sure is listening to this right now. So, hey, what’s up, man?

Zach Wojtowicz:

Shout out, Dan.

Charley Burtwistle:

He talked about someone asked … We had a live Q and A session. Someone asked him, are you scared about this looming, scary R word – recession, that’s being thrown around? He said, look, we founded Buildertrend in 2006. We’ve been through this before. And we wouldn’t be where we’re at today if it wasn’t for the ’08 crash because it got rid of a lot of competitors. It provided opportunity for our business to scale, and people needed scalable solutions to help optimize their business. And that’s what Buildertrend was. So, it was a motivational talk for sure. And I think that applies to all of our listeners and anybody in any business right now.

Zach Wojtowicz:

That’s right. Well, and put my history hat on. You know me. I mean, recessions are a natural cycle of any economy. And sometimes it comes down to why is the recession on setting? And in this case, it isn’t like 2008 where there’s a collapse of the broader economic systems that brought down, not just the United States economy, but international markets. So yeah, I mean, I think for all our listeners out there, hopefully enjoyed these conversations that we’ve been having. And thank you for joining us on “The Building Code.”

Charley Burtwistle:

Absolutely. As always make sure to like, review, subscribe, join “The Building Code” crew on Facebook. Shoot Zach a nice comment. Give him five stars.

Zach Wojtowicz:

Wow. Listen to this guy’s tune changing all of a sudden Mr. Positive.

Charley Burtwistle:

Yeah, absolutely. Talking to Bill will do that to you.

Zach Wojtowicz:

 That’s right.

Charley Burtwistle:

Thank you guys. We’ll see you next time.