Economics Of Homebuilding
Economics Of Homebuilding
Economics is the study of how people use scarce resources to satisfy their unlimited wants. (McEachern, p.2)MHI Homebuilders is a company that builds houses in the metropolitan areas of Texas. There are several issues that effect the company, which relates to economics. There are interest rates, price of materials and labor and lastly the demand of the product. One of the current dilemmas the company is facing is how to stay competitive with the competition, during the current recession and economic downturn. Even though the homebuilding industry is doing fairly well, there is still room for gaining market share and improving customer service and satisfaction. The economics changes in the lending rates of banks and the mortgage rates of the consumers play a vital role in our ability to receive money to build and the consumer ability to purchase a home by gaining a mortgage.
There are several other builders trying to build the same types of homes in the same area of Texas. Most of these homes are being built cheaper and more efficient than MHI ‘s homes. Our product is relatively more expensive than some of our competition because we use more expensive, and a better grade of supplies and building materials .We also offer custom building and give the buyer complete choice in all aspects of the finished product through options. The buyer has multiple selections from the floor to the ceiling. It is not a “recipe” or and manufactured type of home, but because of the choices available, the consumer has to purchase 50% of the options to start the interior of the house.
The opportunity cost, which is defined as “The value of the best alternative forgone when an item or activity is chosen, “ in the homebuilding industry is the price of credit. One of the main choices, the company has to make is the ability for receive the best value from our investments by shopping for the best lending rates with the banks. The less we pay to borrow money, the more we can save in when we pay off the loan upon completion of a house. Another way we save money is through offering sales incentives and discounts for our buyers for using our lenders for financing there home. We want the buyers to use our financing company to purchase their homes so we can offer them a good interest rate and they repay their mortgage to our company owned lenders. One of the last ways we try and save money is through acquisition of own Title Company. We have invested in 50% of a title company. This also saves us cost on completing and preparing all of the legal issues and paperwork on the home. Part of the Title Company works exclusively for MHI and handles all of the closing costs and procedures for the seller and well as the buyer or homeowner.
In Texas some of our competition are Centex Homes, Choice Homes, U.S. or General Homes, and Perry Homes. Most of these builders offer a cheaper plan that MHI and do not require a substantial amount of Earnest Money down to purchase. Most of these builders have “special” programs to help the buyer ‘s ability to afford the purchase of a home. MHI does not currently have a program such as this in place. As a company we may be losing a portion of market share because of our strict requirements on purchases.
This also effects the demand of our product, which is the “relation showing the quantities of a goods that consumers are willing and able to buy at various prices during a given period of time, other things constant.”(McEachern, p. 46). As our price goes up, the consumers demand for the product decreases. The prices of our financing can also effect the demand of our product when compared to the competition. We have tried to combat this issue with offering free furniture up to $2500.00 based on a home purchase. This incentive is promoting the growth of sales and increase MHI ‘s attractiveness in the market. The more we can attract the buyers away from the competition, the more houses we can sell through excellent customer service and marketing strategies.
One of the last ways the economy effects MHI is through the company’s ability to manage it resources. Resources are “ The input, or factors of production, used to produce the goods and services that humans want; they consist of labor, capital, land, and entrepreneurial ability. (McEachern, p. 2) The company must use it resources as efficiently as possible. The materials and labor is one of the most expensive aspects of the homebuilding industry. Since most of the jobs are performed by contract labor, it is difficult to stabilize the labor costs. Labor can be describes as “the physical and mental efforts of humans used to produce goods and services”. (McEachern, p. 2). The company strives to provide excellence in the finished product so the laborers are paid by phases of completion. The project manager inspects the quality of the work and construction managers of MHI insures high standards and work ethics among contractors. Land is another aspect of the business that is very costly to the company. Not only does the company purchase lot and plot of land; we also develop the land into useable materials for building. In this aspect of the business most of the cost are loss if our projects in the lots are unsuccessful. When the company decides to get out of a subdivision or land acreage, the best way to recover the cost is through selling the developed land to third parties. Since the value of land does not decrease, it has become a very profitable aspect of our business, especially when we can sell the land to other builders and developers.
In conclusion, MHI success depends heavily on several aspects of economics. From the development and purchase of land to the roofing and landscaping of the finished product there are several decisions that have to be made to satisfy the goals of the company. The company resources and capital are directly effected by the economic swings of the market as well as the consumer’s purchasing power. The banks interest rates and the creditworthiness of both the seller and the buyer effects the ability of each party to build and purchase houses. In the end, the goal of the company is to provide the best quality product for the consumer at the lowest cost possible. Our costs as a company may not be as low as some of the competition, but MHI will not sacrifice the quality of the product for profit. This is why MHI stands by is company slogan, “MHI, the mark of integrity and excellence”.