To all professionals managing the repair and maintenance of distressed properties—your cost of doing business may not be what you think it is. Xactware cost data indicated price volatility throughout many categories during 2018 and early 2019. These price fluctuations, some of which were quite sudden, rendered older and outdated pricing data sets too unreliable for making business decisions. Combined with the competitive pressures of the shrinking foreclosure market over the last ten years, using regularly updated and researched local pricing data is more critical than ever. Without proper safeguards, these dramatic shifts in costs can swing allowance thresholds and undermine profitability in ways that can seriously injure businesses over time.
Getting the numbers right. To illustrate the point, we’ll first look at retail labor rates by trade for drywallers. According to Xactware pricing trend data, 2018 average property preservation and maintenance retail labor rates rose by an average 4.3% across the board, with drywall installers showing a 10% increase. Combined with a 4% rise in the cost of drywall materials, it’s easy to see that if the average rates for all trades were applied to servicer’s charges, they would not have accounted for the particular spike seen in the drywall industry.
Price hikes like these are concerning because they undermine the historically “accurate-enough” gut checks and infrequent price verification that servicers tend to rely on in the course of normal business, resulting in retail price adjustments that lag far behind the actual costs they incur. That’s what makes having automated, current, and local pricing data so crucial.
Significant changes across the board. Labor isn’t the only pricing component that’s seeing abnormal increases. 2017 and 2018 averaged a 3.31% spike in general materials costs compared to 2016’s comparatively slight 0.41% increase—an equally dangerous shift for default servicing professionals relying on approximated pricing data even a few years old.
One of the more nuanced dangers of comparatively sudden cost increases is that they’re occurring in an industry that hasn’t historically needed to closely track them. The current market has a long history of relatively mild increases and decreases in labor and material prices. These smaller, more predictable shifts have engendered a reliance on familiar, slow-to-update data sets that are too generalized to provide the specificity needed in local markets. Unfortunately, reliance on generalized pricing data threatens businesses’ profitability during times of sudden, major cost changes. Without precise, localized cost data that is consistently updated, precise project estimating is all the more difficult to accomplish.
Short-term fluctuations can be as dangerous as major year-over-year changes without a comprehensive data set. To understand the impact even month-to-month price variances can have, consider U.S. lumber prices observed during 2018. Lumber had a comparative percentage annual increase of 3.2% by the end of June, a 5.8% spike by the end of July, a subsequent fall to 4.2% in September, and a crash to 0.06% in December. A reliance on pricing data even a few months out of date or based on just one or two points throughout the year would have placed approximated lumber costs wildly off the mark and significantly impacted profitability margins.
Changing pricing trends aren’t the only reason to dial in the precision of your data when scoping out the cost of work. Post-recession mortgage regulations and a stronger economy have caused the inventory of available default properties to plummet. In 2009 the mortgage delinquency rate in the United States was 14.41% (New York Times). Ten short years later data from the beginning of 2019 indicated that only 4% of properties were in delinquency status. For the property preservation and maintenance industry, this means fiercer competition and narrower profit margins. Every penny counts. But with less and less available work, those pennies count a lot more.
Which is all to say that anyone working in the default property servicing industry, whether they’re a field servicer, investor, contractor, or asset manager, should make sure they rely on data sets that are updated, localized, and comprehensive when estimating the cost of repairing or maintaining properties. The pressures of diminishing inventory combined with a fluctuating market are making once sufficient preservation and maintenance cost methods obsolete.