SHOW TRANSCRIPT

Mike Schnitzer – Discussion about the Lumber Crisis

 Speaker 1 [00:00:01] All right, hey, here we are, another episode of the Go with John show, we’re at the Long and Foster Studios in McLean, Virginia. And today we have Michael Schnitzer with us, president of Stanley Martin Custom Homes. Welcome, Michael Moore.

 Speaker 2 [00:00:14] And John, so this is your

 Speaker 1 [00:00:15] third time sitting down with us and we appreciate you coming back. And today we are going to talk about the craziness that’s going on in the homebuilding industry with pricing in general and in particular lumber pricing. So tell us a little bit about what’s going on here at a high level.

 Speaker 2 [00:00:37] Yeah, so good Segway the so

 Speaker 3 [00:00:42] every cost category, whether it’s lumber, concrete, drywall, trim,

 Speaker 2 [00:00:49] windows, you

 Speaker 3 [00:00:50] name it, everything is going up. But by far the lumber roof, trusses, sheathing floor and wall sheathing

 Speaker 2 [00:00:59] panels,

 Speaker 3 [00:01:01] they are going up at a ridiculous or have gone up a ridiculous amount. Right. Right. Well over 300 percent. And if

 Speaker 2 [00:01:09] you if you look at what how much of

 Speaker 3 [00:01:13] the price is based on how much you call it framing.

 Speaker 2 [00:01:16] Yeah, Honan’s right.

Speaker 1 [00:01:18] The price of a house.

Speaker 2 [00:01:19] Yeah, yeah, yeah. It is huge, you know, and since 1998, we have always

Speaker 3 [00:01:29] honored our pricing.

Speaker 2 [00:01:31] And, you

Speaker 3 [00:01:32] know, sometimes prices may go up a little bit,

Speaker 2 [00:01:34] whatever. We would just eat it or

Speaker 3 [00:01:37] we would negotiate with our trades to maintain old price.

Speaker 2 [00:01:41] But today is just a today’s environment is just completely I almost want to say it’s a

Speaker 3 [00:01:46] and maybe I’m right like an act

Speaker 2 [00:01:48] of God. I mean, this pandemic has just shifted everything.

Speaker 1 [00:01:52] And it’s a once in a generational event to multigenerational generally. Right. Exactly.

Speaker 3 [00:01:58] And you go back to World

Speaker 1 [00:01:59] War One, right? Exactly. And so you said since 1988, we’ve always honored our price. 97, 98. Yeah. So we certainly do honor our our pricing. And I think for for for all of our buyers who have ever bought a home from us, who have signed a contract and gone through the process in a prototypical timeline. Right. The price has always been locked in and even even going back, you know, in our contract, if you don’t pour your footers within so many months, we have the right to raise pricing, but we’ve never done it. Right. Right. And we have a no pressure sales policy.

Speaker 2 [00:02:35] Exactly. So so

Speaker 3 [00:02:36] so some of our customers

Speaker 2 [00:02:39] are outside that window of time. Right. And it’s put us

Speaker 3 [00:02:45] in a terrible position. And it’s, you know, so for for me, I feel terrible. And it’s a very uncomfortable position.

Speaker 1 [00:02:53] As for me.

Speaker 3 [00:02:54] As for you.

Speaker 2 [00:02:55] But I don’t want

Speaker 3 [00:02:56] to say that our level

Speaker 2 [00:02:59] of

Speaker 3 [00:03:01] discomfort is anywhere near when we have to call a customer and say we have to raise your prices.

Speaker 2 [00:03:08] Right. So, you know, so,

Speaker 3 [00:03:11] you know, we certainly have compassion.

Speaker 2 [00:03:13] But, you know,

Speaker 3 [00:03:15] for us to

Speaker 2 [00:03:16] maintain as a viable business, we you know, we

Speaker 3 [00:03:21] we have to raise our prices with with some of our customers.

Speaker 1 [00:03:24] You know, not many.

Speaker 2 [00:03:25] There’s there’s there’s some customers that that we need to raise.

Speaker 3 [00:03:29] We need to raise the price.

Speaker 1 [00:03:31] And I think what’s happened here and then we’ll move on to what we’re doing about it and how we’re going to communicate going forward. But what’s happened here is, are no pressure. Sales policy has collided with a catastrophic global event. And, you know, for forever in time since the history of our company and since you and I teamed up, 100 percent of the buyers who went into a contingent contract with us were able to secure the pricing at that time, even

Speaker 2 [00:04:00] for many years, for many years, because been saying

Speaker 3 [00:04:03] we’ve had customers who have stayed

Speaker 2 [00:04:04] in contingency and we haven’t built a house

Speaker 3 [00:04:07] for two years after they signed a

Speaker 1 [00:04:10] contract and we stood behind the price,

Speaker 3 [00:04:12] stood behind the price is just a it’s a terrible, unfortunate. This pandemic has really changed everything in two ways. Right.

Speaker 2 [00:04:20] So one is you have this supply chain disruption. No. Right. And two, you have

Speaker 3 [00:04:30] people who are saying I need to change how I live in my

Speaker 2 [00:04:33] house. Right.

Speaker 3 [00:04:35] Based on, you know, part time working from home or full time working from home.

Speaker 2 [00:04:39] And so if you look at the supply and demand, we’ve got this demand

Speaker 3 [00:04:44] curve that

Speaker 2 [00:04:45] is I mean, it’s almost like exponential in

Speaker 3 [00:04:49] its in its upward trajectory. Right.

Speaker 2 [00:04:52] And then you’ve got the supply chain that has been down in

Speaker 3 [00:04:56] the other direction.

Speaker 2 [00:04:59] And I think that if you look at the the the the supply side, the it’s

Speaker 3 [00:05:08] not a matter of resources. Right. Right. And, you know, everybody

Speaker 2 [00:05:12] who is an environmentalist may

Speaker 3 [00:05:14] want to kind of plug their ears, but there is enough resources

Speaker 2 [00:05:19] to build houses right

Speaker 3 [00:05:21] out of lumber, plenty

Speaker 1 [00:05:22] of trees,

Speaker 3 [00:05:23] plenty of trees.

Speaker 2 [00:05:24] The issue is with covid,

Speaker 3 [00:05:26] you know, there were certain restrictions, right? So if you just

Speaker 2 [00:05:29] take just use

Speaker 3 [00:05:30] a number. A thousand people working in a factory just making this up. Yeah, right. Maybe during the height of the pandemic, there was only 200 people just spacing and whatever. Right. Yeah.

Speaker 2 [00:05:43] And as the

Speaker 3 [00:05:44] country

Speaker 2 [00:05:45] continues to get vaccinated,

Speaker 3 [00:05:47] these of the reaching herd

Speaker 2 [00:05:48] immunity. You know, many ways one would anticipate that

Speaker 3 [00:05:54] the throughput manufacturing will increase. Certainly some from what I’ve heard, some of

Speaker 2 [00:06:01] the

Speaker 3 [00:06:02] lumber mills, I’m

Speaker 2 [00:06:03] not talking about OSB and sheathing, but some

Speaker 3 [00:06:06] of the lumber mills

Speaker 2 [00:06:08] have shut down because they have to go

Speaker 3 [00:06:12] through a term called deep cleaning, where they literally have to deep

Speaker 2 [00:06:15] clean the mill. And some of these mills have held off deep cleaning because of covid.

Speaker 3 [00:06:24] So once the restrictions are relaxed, I’m sure they’re going to deep clean,

Speaker 2 [00:06:29] but

Speaker 3 [00:06:30] there’s still only a certain throughput regardless. Right?

Speaker 2 [00:06:35] So the demand is just

Speaker 3 [00:06:39] crazy,

Speaker 2 [00:06:40] right. And one would anticipate the supply will increase. I just don’t know if the supply will

Speaker 3 [00:06:49] increase

Speaker 2 [00:06:51] to I don’t say

Speaker 3 [00:06:52] you, but overcome the demand. It’s just a crazy.

Speaker 1 [00:06:57] It seems like this is going to go on for a while. It doesn’t feel like this is going to be over in a year. It feels like this is kind of the new normal for the foreseeable future. And when I say, you know, the next two or three years, I mean, it’s hard to look three years out, but it really doesn’t feel like anything is going to change in 2022.

Speaker 2 [00:07:16] Well, based on statistics. And what if you

Speaker 3 [00:07:21] just look at large builders are projecting with starts?

Speaker 2 [00:07:26] Certainly this

Speaker 3 [00:07:28] appears to be,

Speaker 2 [00:07:32] you know, at least

Speaker 3 [00:07:33] a year out. I mean, it’s hard to know. Right?

Speaker 2 [00:07:36] We’re just making a hypothesis. But, you know, at

Speaker 3 [00:07:40] Stanley Martin, Stanley Martin’s ranked 21st

Speaker 2 [00:07:43] among all

Speaker 3 [00:07:44] builders in the United States, and we so they do a very large

Speaker 2 [00:07:49] volume of houses and we have a team of people

Speaker 3 [00:07:55] on the corporate side that manage our supply chain

Speaker 2 [00:07:59] and

Speaker 3 [00:08:00] manage our commodities. So Stanley Martin is 100 percent focused on getting the materials

Speaker 2 [00:08:06] to the

Speaker 3 [00:08:07] job sites, and they’re focused

Speaker 2 [00:08:10] on managing

Speaker 3 [00:08:12] our cost structure to the best

Speaker 2 [00:08:14] they can. Right. Right. So, you know,

Speaker 3 [00:08:17] so certainly I think our customers can be comforted that they’re we’re still leveraging our largesse.

Speaker 2 [00:08:23] Right. But with supply and demand, the the we don’t have

Speaker 3 [00:08:30] the front seat of the bus right now, whereas the suppliers deal.

Speaker 1 [00:08:33] Right. So, you know, the other thing is the good news about our organization is we’re not having any difficulties getting materials. I’m hearing there are a lot of builders out there that we’re

Speaker 2 [00:08:42] having to manage it

Speaker 3 [00:08:43] and this longer lead time. Exactly. So I don’t want to say that we’re not having difficulties, but we’re managing through the difficulties because of our largesse.

Speaker 1 [00:08:54] Right, exactly. But we’re not in the same situation as some of these other smaller builders are in where they just can’t get lumber. Right. Some of these smaller builders are going to their suppliers saying I need a lumber package. And they say it’s going to be some time. Who knows? Exactly.

Speaker 2 [00:09:10] Yeah, yeah, yeah.

Speaker 3 [00:09:10] And the lumber suppliers are on what’s called allocation. Yes. Right. So they’re know what the lumber market says. There’s no free, not free meaning no cost. There’s no free lumber lumber. It’s all allocated way out in the future for builders. Yep, yep, yep. So it’s really driving the price. Yeah.

Speaker 1 [00:09:30] So so just to kind of recap that a little bit, so, so we have a very unfortunate situation which we feel terribly about, that some of our buyers are caught in this kind of a squeeze play between our no pressure sales policy and prices going up. And we’re getting ahead of it for all of our buyers that are already in process that may get hit by this dart where we’re giving them advance notice. Hey, here’s what the contract says. We want to make you aware that this may happen. You may want to, as quickly as possible, go through the buying process. We don’t want to put any pressure on you. However, we want to make you aware of this. So those are the two things we’ve we’re doing so far. And then thirdly, I think we’ve come up with a way to manage the situation for our our current customers that are coming into the transaction now where we’re indexing. Right. A piece of the transaction. Right. Right. So, so. So, by the way, for the folks listening on audio, we are also have this on our Web site, this recording, along with some slides. We’re going to we’re going to roll the slides of the of the lumber prices so you can see the chart. I mean, it’s absolutely crazy, right? And you can see looking at the chart going back last year, we had a spike and a dip and a spike and a dip. And now it’s just going straight up. There’s no apparent relief coming in pricing. Right.

Speaker 3 [00:11:04] So right.

Speaker 2 [00:11:06] So my thought was by

Speaker 3 [00:11:09] far, even though everything is going up, the framing components have the greatest

Speaker 2 [00:11:14] impact based on the volatility and the amount of money that we have to spend on

Speaker 3 [00:11:19] lumber. Right, on lumber.

Speaker 2 [00:11:20] So what we’ve decided to do is

Speaker 3 [00:11:23] index a portion of the price

Speaker 2 [00:11:26] to

Speaker 3 [00:11:26] what’s called the random

Speaker 2 [00:11:28] lengths commodity

Speaker 3 [00:11:30] market. Right.

Speaker 2 [00:11:31] And so we take a time point and

Speaker 3 [00:11:35] we do an averaged index. Right. It’s a random length’s index.

Speaker 2 [00:11:41] And then

Speaker 3 [00:11:41] when a customer starts construction, we do another averaged

Speaker 2 [00:11:45] index. Right. We look

Speaker 3 [00:11:48] at the difference

Speaker 2 [00:11:49] in those indices and

Speaker 3 [00:11:52] it’s a percent difference. Right.

Speaker 2 [00:11:55] Right. A percent change times this.

Speaker 3 [00:11:59] We call it a lumber factor. Right. So I’m just gonna pick a number. Right. Say the lumber factor’s fifty thousand. Right.

Speaker 2 [00:12:06] And let’s say the the index

Speaker 3 [00:12:10] increases by 20 percent.

Speaker 2 [00:12:14] Right.

Speaker 3 [00:12:14] Then our customers would we’re basically passing on our cost

Speaker 2 [00:12:19] would pay the additional

Speaker 3 [00:12:22] 20 percent times that lumber

Speaker 1 [00:12:23] factored. Right. Of the 50000 of the 50. So their price would go up ten.

Speaker 2 [00:12:29] Ten thousand dollars. Yes.

Speaker 3 [00:12:30] Now we have a threshold. Right.

Speaker 2 [00:12:33] So just because

Speaker 3 [00:12:33] the increase goes up a little bit doesn’t mean we’re going to charge. But there’s a or give a credit. But as the number goes up or down, once it passes a threshold, then we either decrease their price right where we increase their price. And the goal

Speaker 2 [00:12:51] is not to take advantage of this. We just want to make a hole and we don’t want to make money

Speaker 3 [00:12:57] on a crazy commodity market. So if the commodity market does

Speaker 2 [00:13:01] go down, we

Speaker 3 [00:13:03] want a credit back a portion of the price based on this lumber. So very

Speaker 1 [00:13:07] simple. So if if if the lumber factor goes, if the if the random lengths average goes down by 20 percent, our buyers would get a ten thousand dollar credit. Right. Yeah. So this way it’s fair to everybody.

Speaker 3 [00:13:19] It’s fair to everybody.

Speaker 2 [00:13:20] And the good news is.

Speaker 3 [00:13:21] So the industry uses random lines.

Speaker 2 [00:13:23] Yes.

Speaker 3 [00:13:25] I’ve done probably more research than I’ve really wanted to do.

Speaker 2 [00:13:29] Yeah. But if,

Speaker 3 [00:13:31] if our customers Google like MarketWatch, random

Speaker 2 [00:13:34] lens. Yeah. They can see

Speaker 3 [00:13:37] a random lens

Speaker 2 [00:13:38] value. Now I don’t know how they

Speaker 3 [00:13:40] come up with their specific random lines that

Speaker 2 [00:13:43] explain in a second. So you can see

Speaker 3 [00:13:45] daily what the random lens market is doing based on how they measure random lines. Yeah, right. And you can see the trend, which is probably the most important. Yes, right. Our random Lens index, which we get from our supplier when I say we are commodity’s team,

Speaker 2 [00:14:01] is based

Speaker 3 [00:14:01] on a very finite list of materials. Right. It’s not cedar and spruce and hem for blah, blah, blah and different sizes.

Speaker 2 [00:14:11] There’s a finite size and species

Speaker 3 [00:14:14] of materials that we’ve negotiated with our supplier and we pin our random

Speaker 2 [00:14:19] lens index based on that specific amount. Right. And whereas I don’t

Speaker 3 [00:14:24] know what

Speaker 2 [00:14:24] MarketWatch is using, I haven’t had the time

Speaker 3 [00:14:26] to figure it out.

Speaker 2 [00:14:28] But I mean, they generally flow and within a band, usually of about the same values, just not going to be exact.

Speaker 1 [00:14:35] Right. And we get updates every week.

Speaker 2 [00:14:37] We get so

Speaker 3 [00:14:38] so our supplier sends us

Speaker 2 [00:14:39] a weekly update. And so we felt like this was the

Speaker 3 [00:14:45] most transparent way that our customers can

Speaker 2 [00:14:49] look at and get an idea

Speaker 3 [00:14:51] of what the random lens market is

Speaker 2 [00:14:54] doing by the minute. Right. If they want to know what.

Speaker 3 [00:14:59] The specific random lens average is that we’re using for that particular week, we have the charts that we get from where we have

Speaker 2 [00:15:08] the indices that we get and we and we map it out.

Speaker 1 [00:15:10] Sure. Each and we provide that to our

Speaker 3 [00:15:12] and we provide it to our

Speaker 2 [00:15:14] customers. So this to me seems to be the most

Speaker 3 [00:15:18] the fairest way

Speaker 2 [00:15:19] on both sides to manage this crisis, to

Speaker 3 [00:15:22] manage the crisis.

Speaker 1 [00:15:23] So let’s take a quick break. And when we come back, we will dove more into this. We’ll be right back with Michael Schnitzer, president of Stanley Martin Custom Homes. All right, we are back with Michael Schnitzer, president of Stanley, Martin Custom Homes and Michael, let’s get into the data, because you are a detailer to the tenth degree for sure. Yeah, and we’ve got the charts that folks can see on our website and our and our YouTube channel up on the screen. Which chart do you want to start with, Mike?

Speaker 2 [00:16:02] So I would start with we can look at the path of

Speaker 3 [00:16:08] lumber and

Speaker 2 [00:16:09] panels, OK, in 2020.

Speaker 1 [00:16:12] OK, let’s talk about that and let’s take a look at that. So we’ve got that up on the screen. So tell us what we’re looking at.

Speaker 2 [00:16:18] So this is obviously a snapshot of 2020 starting at week one. Yes, going to week 52. Right. So obviously we’re plotting the index values

Speaker 3 [00:16:31] that average index per week.

Speaker 2 [00:16:33] And so the chart

Speaker 3 [00:16:34] tells a pictorial story of what’s going on. Yeah, and our customers

Speaker 2 [00:16:39] can see that

Speaker 3 [00:16:41] that the

Speaker 2 [00:16:41] random Lens index

Speaker 3 [00:16:43] was pretty stable through,

Speaker 2 [00:16:47] I would

Speaker 3 [00:16:47] say, the first third of the year. Right.

Speaker 2 [00:16:51] Then it had a little blip up. Right. Then it went down. Right. And then it started

Speaker 3 [00:16:58] another upward trend in the latter part of the summer and

Speaker 2 [00:17:03] it almost looked like it was beginning to plateau.

Speaker 3 [00:17:06] Yeah. By the end of the year.

Speaker 2 [00:17:07] So what does it tell us? It just it’s

Speaker 3 [00:17:10] just a picture telling a story of where the pricing is relatively

Speaker 2 [00:17:15] consistent. Yeah. In the beginning of the pandemic, then it blipped up. Yes. Then it went back down right to I’m going to

Speaker 3 [00:17:24] just call it normal levels. Then it started its slow march. I say slow weekly march up, right. Yes.

Speaker 2 [00:17:33] And then it looked like at the end of the

Speaker 3 [00:17:36] year

Speaker 2 [00:17:36] it was beginning to plateau. Right. So that was the 20/20 chart.

Speaker 3 [00:17:42] Yeah.

Speaker 1 [00:17:42] So really no reason for alarm. Right. We have some say.

Speaker 3 [00:17:46] Right.

Speaker 2 [00:17:47] I mean, we knew the pandemic was pushing everything right.

Speaker 3 [00:17:51] It was just creating supply chain havoc.

Speaker 2 [00:17:55] Right. You know how much of that last year was based on demand? I don’t you know,

Speaker 3 [00:18:01] certainly home sales were were strong, but they weren’t in this.

Speaker 2 [00:18:06] I mean, I always call it a wacky environment.

Speaker 3 [00:18:08] Yeah. With home sales and home construction now.

Speaker 2 [00:18:11] Right. So so that’s that’s what’s what’s going on there.

Speaker 3 [00:18:15] Then we have another chart kind of telling a different story.

Speaker 2 [00:18:19] And this is a chart that shows

Speaker 3 [00:18:22] the year over year change

Speaker 2 [00:18:25] in the index. OK, and what I thought was

Speaker 3 [00:18:29] important

Speaker 2 [00:18:30] was customers can see going back to

Speaker 3 [00:18:34] 2013, the year over year change. And you can

Speaker 2 [00:18:38] see by looking at these lines and

Speaker 3 [00:18:40] their various colors, you know,

Speaker 2 [00:18:42] depict the various and we’re

Speaker 1 [00:18:43] very close together.

Speaker 2 [00:18:44] And the band is pretty close together, right? Yeah. And then in 2020, all of a sudden you see what almost looks like a sine wave.

Speaker 3 [00:18:55] It really spiked up year over year. Then it went precipitously down. Right. Then it started

Speaker 2 [00:19:01] to go up. And then if you go back to week one, so this would be of 20, 21.

Speaker 3 [00:19:07] So now it’s measuring week one of

Speaker 2 [00:19:09] 2021, right against week one of twenty twenty. And it’s plotting the change in the indices. Yes. And you can see what

Speaker 3 [00:19:19] lumber and panels are doing year over year. And I just thought it’s a it’s a great story to

Speaker 2 [00:19:26] tell and it just shows how

Speaker 3 [00:19:31] I’ll use the word not random yet, but I don’t use the word volatile. I’ll just use the word wacky.

Speaker 1 [00:19:39] It’s crazy because it’s almost like you’ve just got this random data that’s up in the middle of the chart that’s not at all correlated with all the other data over a seven year period.

Speaker 3 [00:19:49] Yeah. So it’s crazy. Yeah.

Speaker 2 [00:19:51] It’s just it’s just a it’s a weird time. And, you know,

Speaker 3 [00:19:54] a lot of our customers say, well I

Speaker 2 [00:19:55] don’t know. And I’m like, I

Speaker 3 [00:19:56] don’t know either. Yeah, right. I can only tell you we’re in a

Speaker 2 [00:20:00] huge

Speaker 3 [00:20:01] housing surge, sales, construction.

Speaker 2 [00:20:05] I can tell you that

Speaker 3 [00:20:06] many builders have sales moratoriums. Yes. To slow down the surge. Right. So there’s all kinds of stories that people can can just go online and read about sales, prices and contracts.

Speaker 2 [00:20:21] Right. Home values and things of that nature.

Speaker 3 [00:20:23] So those charts are really just to help

Speaker 2 [00:20:25] tell the story of

Speaker 3 [00:20:28] where we are.

Speaker 1 [00:20:28] Right. So those charts are not what we’re using to come up with the.

Speaker 3 [00:20:35] Well, those charts are the data, the

Speaker 2 [00:20:37] data, OK, but the data set

Speaker 3 [00:20:40] is really when you want to look at the raw numbers, you’ve got to look at the random

Speaker 2 [00:20:45] Lens index.

Speaker 3 [00:20:46] Got it every week from our supply.

Speaker 1 [00:20:48] Got it. Got it. Makes perfect sense. OK, yeah. So, Michael, so using the data, can you explain the mechanics of how we are going to use the data to help control our numbers and protect our buyers?

Speaker 2 [00:21:04] Sure. So we have a a supply chain, an indexed exhibit

Speaker 3 [00:21:14] to our contracts. Yes. And so customers can reference that. So I’m going

Speaker 2 [00:21:18] to talk about a couple things. Right. So, one, this exhibit and if they look at the last page, it shows what’s

Speaker 3 [00:21:26] called random

Speaker 2 [00:21:27] lens, the

Speaker 3 [00:21:30] the first set of criteria or the actual framing components we’re using

Speaker 2 [00:21:37] to index

Speaker 3 [00:21:38] our lumber costs. OK, right. So if the customers look at that

Speaker 2 [00:21:43] table, they’ll

Speaker 3 [00:21:44] see the first. The top table says Frame Lumber Composite LCB. LCB stands for Lumber Composite, Broad Market. OK, and the first line item says Green Douglas fir Portland rate number two and better two by 10 random. And it gives a particular tag

Speaker 2 [00:22:04] off to the side says L a

Speaker 3 [00:22:07] zero. Right. So you can look through and see what are we actually what is this criteria that corporate is using with our supplier to index.

Speaker 2 [00:22:17] Right. And then the same thing.

Speaker 3 [00:22:19] If the customers or people want to look at this chart again, they can see the structural panel

Speaker 2 [00:22:24] composite

Speaker 3 [00:22:26] and for the first line will say oriented strand board eastern Canada. And that has a particular tag number. So those are the actual costs that we’re using to create our index.

Speaker 2 [00:22:40] Gotcher that’s step one. Yes.

Speaker 1 [00:22:42] Yep.

Speaker 2 [00:22:43] Then step two is we get

Speaker 3 [00:22:45] every week the average index

Speaker 2 [00:22:49] based on those tags, based on that

Speaker 3 [00:22:51] specific material. And so if the customers look at what we’re calling

Speaker 2 [00:22:56] in the exhibit,

Speaker 3 [00:22:57] the chart, which is what our supplier sends us, it’s called the Random Length’s Market Indicator Tracking. And this is for 2020 once the year we’re in. Right.

Speaker 2 [00:23:08] And I’ve highlighted two columns. One says

Speaker 3 [00:23:11] the first column,

Speaker 2 [00:23:12] yellow column in the one, the left

Speaker 3 [00:23:14] says average LCB lumber composite broad market. And it says underneath that

Speaker 2 [00:23:20] it says Skemp,

Speaker 3 [00:23:21] which stands for composite.

Speaker 2 [00:23:23] And they’ll see

Speaker 3 [00:23:24] another yellow column to the right, and that’s the average panel

Speaker 2 [00:23:29] composite column.

Speaker 3 [00:23:31] So if the customers look at week one, for instance,

Speaker 2 [00:23:35] it says

Speaker 3 [00:23:35] 874 for lumber composite

Speaker 2 [00:23:38] and it says nine seven

Speaker 3 [00:23:41] ninety four for panels.

Speaker 2 [00:23:43] Right. And you can step

Speaker 3 [00:23:44] week after week after week after week. So the criteria were the starting

Speaker 2 [00:23:50] index that we’ve

Speaker 3 [00:23:51] used for our current customers are weeks 11 through 14.

Speaker 2 [00:23:57] And that coincides with

Speaker 3 [00:24:00] our our current pricing.

Speaker 2 [00:24:02] Right. Is using that data set.

Speaker 3 [00:24:04] And I never use a particular day or a particular week. We use a prior four week average. Yes. So that gets rid of any spikes and creates some normalization. Yes. So if our customers look at that chart again,

Speaker 2 [00:24:20] they’ll see I highlighted

Speaker 3 [00:24:23] four

Speaker 2 [00:24:24] rows. Yes.

Speaker 3 [00:24:26] Weeks 11 through 14 and in green and highlighted their values.

Speaker 2 [00:24:31] And they’ll see

Speaker 3 [00:24:32] the average of those for weeks

Speaker 2 [00:24:34] with a

Speaker 3 [00:24:35] blended average, right? Yes.

Speaker 2 [00:24:37] And it’s nine fifty nine.

Speaker 1 [00:24:40] So that would be a starting point.

Speaker 2 [00:24:42] That would be

Speaker 3 [00:24:43] in the contract. So that’s their data set.

Speaker 1 [00:24:45] So that’s their number. So that’s

Speaker 3 [00:24:47] their starting point

Speaker 2 [00:24:48] index.

Speaker 1 [00:24:49] Right. And that number would be tied to we’ve used 50000 dollars as just

Speaker 2 [00:24:55] on that article. Yeah. Yes. And in in in this exhibit

Speaker 3 [00:25:01] we have thirty five at thirty five thousand dollar

Speaker 2 [00:25:03] hypothetical. Sure. Sure. You know, part of it is

Speaker 3 [00:25:06] how small is your house, how big is your head.

Speaker 1 [00:25:08] So in your contract you will have a lumber index

Speaker 2 [00:25:12] and we’ll have a

Speaker 3 [00:25:13] lumber factor, a factor which is for lumber and

Speaker 2 [00:25:18] wall panels and

Speaker 3 [00:25:19] sheathing and roof trusses. It’s a lumber factory.

Speaker 1 [00:25:24] So every house has its own lumber factor. And it will be in the contract right. Then that index number is what we’re using as the business will be.

Speaker 2 [00:25:32] That value will already

Speaker 1 [00:25:33] be there and that’ll be in the contract. Right. Well, yeah,

Speaker 3 [00:25:35] if if our customers continue to look at the chart, they’ll

Speaker 2 [00:25:38] see, oh well, week 15 and week 16

Speaker 3 [00:25:42] have populated values for the index. Right. Right. At the time when I printed this chart, we only

Speaker 2 [00:25:48] had values up to week

Speaker 3 [00:25:50] 16. Right. So as we march forward every week, we get

Speaker 2 [00:25:54] updated information and just keeps populate. Yeah. So the

Speaker 3 [00:25:59] if if our customers

Speaker 2 [00:26:00] look at the hypothetical example and that’s

Speaker 3 [00:26:03] going to be on the first page of their

Speaker 2 [00:26:06] exhibit, it

Speaker 3 [00:26:07] says versus a hypothetical example,

Speaker 2 [00:26:10] it’s at the bottom of the

Speaker 3 [00:26:10] page first. It’s that lumber factor. Yes. Right. And in this example, we’re using 35000. Right. Right. Could change. Right. Depending on the

Speaker 2 [00:26:20] house and the customers,

Speaker 3 [00:26:22] what the customer selected. We’re saying that there’s this threshold

Speaker 2 [00:26:26] and in this

Speaker 3 [00:26:27] example, we’re using it all examples. We’re using a percentage of that lumber factor. And we’re saying if the price goes up or down within that threshold, we’re not going to adjust the price. Right. Right. So we’re potentially eating more or we’re getting a

Speaker 2 [00:26:45] little bit of a dividend one

Speaker 3 [00:26:47] if the price goes down. So the threshold is 10 percent. Right. So if you had a thirty five thousand dollar lumber factor and a threshold of 30 of of 10 percent. Yeah, the price the

Speaker 2 [00:26:59] the the actual

Speaker 3 [00:27:01] price in terms of

Speaker 2 [00:27:03] adjustment would

Speaker 3 [00:27:04] have to increase or decrease beyond thirty five hundred dollars. Right. Right. Right. So in our example

Speaker 2 [00:27:12] we use we call it initial index time point a remember it’s that initial index and in this example

Speaker 3 [00:27:19] we’re using

Speaker 2 [00:27:20] nine 59.

Speaker 3 [00:27:21] That’s a real number based on our current prices. And again, it’s like average price for the prior four week average.

Speaker 2 [00:27:30] We use again, something in the future. Just as an example, we used a final index. And when we say final means,

Speaker 3 [00:27:38] when we’re digging,

Speaker 2 [00:27:39] excavating the foundation. Right.

Speaker 3 [00:27:42] That’s when we’re measuring

Speaker 2 [00:27:44] the index

Speaker 3 [00:27:45] one more time.

Speaker 2 [00:27:46] Right. Right. And then this is it. Right. So the final index we used was hypothetical, one thousand

Speaker 3 [00:27:53] one hundred and three dollars. Right? Right. OK, so that was the prior four week average from when we started excavation. Godchaux If we started excavation on week 40, we would take week thirty nine. Thirty eight, thirty seven, thirty six. And that would be the prior recovery. Yeah.

Speaker 2 [00:28:12] OK. And in that

Speaker 3 [00:28:14] example or in this

Speaker 2 [00:28:16] example, that change

Speaker 3 [00:28:18] was 15 percent. Yes. Right. 15 percent is greater than 10 percent. Therefore the price adjustment would be thirty five thousand times 15 percent or in this case fifty two hundred and fifty dollars.

Speaker 2 [00:28:33] Right. So when we go to excavate the house, we look

Speaker 3 [00:28:37] at the difference, the change

Speaker 2 [00:28:39] and change in the indices, multiply it

Speaker 3 [00:28:42] times the lumber factor, if it’s within a threshold, no change to the price at all. If it’s below or above, then we are going to either decrease or increase the price.

Speaker 2 [00:28:55] And that’s it.

Speaker 3 [00:28:55] There’s no more

Speaker 2 [00:28:56] changing. And the only change would be based on this.

Speaker 1 [00:29:00] Right. So once this happens, then this part of the is off the table. It’s off the table. Yeah. It’s also now using your example, if there is a 15 percent increase, is is the customer paying that whole entire 50 percent.

Speaker 3 [00:29:15] Right. So we’re going

Speaker 2 [00:29:17] to. Yeah, we

Speaker 3 [00:29:18] just did very simply. Yeah, right. 10, 10 percent threshold. Yeah. No change. Got it’s higher or if it’s lower we’re going to change based on that fact.

Speaker 1 [00:29:29] OK, ok. Makes sense. So if, if so anyone listening, if you’re confused, don’t feel bad.

Speaker 2 [00:29:38] Well I think it’s what we have it up on the

Speaker 3 [00:29:40] screen coming

Speaker 1 [00:29:41] up on the screen and, and if you’re, if you’re going through the process with us, set up a time to get on the phone with me and I can chat with you about it some more. But we wanted to record this so you can go back and listen to it and see the charts and hear it as many times.

Speaker 2 [00:29:57] Well, and, John, I’d like to say something else.

Speaker 3 [00:29:59] You know, we’re trying to bring a little bit more

Speaker 2 [00:30:03] sophistication to how

Speaker 3 [00:30:05] we operate our business. Right. And transparency.

Speaker 2 [00:30:09] You and I both

Speaker 3 [00:30:10] know from just the builder community, some builders are saying, Bulloch, in your price when we start construction, I mean, it’s kind of like, what does that mean?

Speaker 2 [00:30:19] Yeah, I mean, so that’s

Speaker 3 [00:30:20] not fair to the customer, in my opinion.

Speaker 2 [00:30:22] Right. So, you

Speaker 3 [00:30:25] know, we’re trying to take a a more a more

Speaker 2 [00:30:30] sophisticated,

Speaker 3 [00:30:30] sophisticated approach, knowing that right now the lumber market. Is completely lacking.

Speaker 1 [00:30:37] Well, so let me just jump in on that a second. You know, so I’m in a unique seat where I get to talk to a lot of people who are in the process of buying a home A to be built home, and 90 percent of them are talking to more builders than just us. And, you know, the feedback I’m getting from them is that there are quite a few builders that are saying, hey, we reserve the right to raise your price if our if our lumber prices go up. And I’m asking, well, how are the how much are they going to raise it? And if the lumber prices go down, are they going to lower it? Well, I’m not they’re not telling me that. So our system and our approach is real. It’s based on real data. It protects the customer. If the prices go down and it protects the builder, if the prices go up, I cannot think of a more fair way to do it. So, anyway, we’re going to take another quick break. We’re going to be back with Michael in just a minute, and then we’re going to talk about some of the good news about the current market conditions. We’ll be right back. Great. All right, we are back with Michael Snitzer, president of Stehly Martin Custom Homes, so thank you for all that great information. We appreciate that, Michael.

Speaker 3 [00:31:49] Sure. I hope it was as clear as clear water and not as clear as mud.

Speaker 1 [00:31:53] Well, the good news is folks can go back and listen to that second segment again if they if they want to to chew on it some more. But I thought it was it was explained very well. So so going forward is Stanley Martin Custom Homes? I think we’ve got a great system in place to protect our buyers, to protect the builder. But what happens when folks sign a contingent contract and they just really take their time going through the process?

Speaker 3 [00:32:21] Right.

Speaker 2 [00:32:21] So as any

Speaker 3 [00:32:25] builder would have in their contract, there has to be a time limit to the price. Right. So you can sign a contract in

Speaker 2 [00:32:34] 2010 and expect

Speaker 3 [00:32:36] the same price in 2014, right? PICKEN Right. So there is

Speaker 2 [00:32:42] a point at which

Speaker 3 [00:32:44] the builder has the right to increase price. Just cost of sales go up. Just forget the pandemic. Just cost the sales go up. Right.

Speaker 2 [00:32:54] Right. We have I can’t think of one example since 1998

Speaker 3 [00:33:00] where we have ever raised the price and we’ve had customers in contingency for a very long time.

Speaker 2 [00:33:09] Right. And we’ve had customers

Speaker 3 [00:33:10] who have removed their contingency. So now we’re starting the

Speaker 2 [00:33:14] plans and it has taken them a

Speaker 3 [00:33:17] very, very, very, very long time,

Speaker 1 [00:33:20] more than a year. I mean, we have more than two years. Yeah, we have we have customers in the process right now that have removed contingencies back in,

Speaker 2 [00:33:28] well, eight

Speaker 3 [00:33:29] months or 10 months

Speaker 2 [00:33:30] or 12. I mean, so, you know, the the great news about

Speaker 3 [00:33:35] a no pressure situation

Speaker 2 [00:33:37] is we you know, we

Speaker 3 [00:33:39] don’t want people to be pressured. We want people to take their time. But there is

Speaker 2 [00:33:44] this time element that, you know, in this case, it was the pandemic

Speaker 3 [00:33:49] that reared its ugly head, so to speak.

Speaker 1 [00:33:52] Yep, yep, yep. No, it makes perfect sense. It makes perfect sense. So so the good news is let’s talk about some of the good news. So we still have a great no pressure sales policy. We’ve got a great program. We’re building houses every day. We’re not having any challenges getting materials. It is taking longer and we are having to work harder. So you may consider it a challenge. I’m happy that we have the materials to build, but we got a

Speaker 2 [00:34:20] team of people.

Speaker 1 [00:34:21] Exactly. A great organization. And so and home values are going up. So the cost of construction is going up, but so is the value of the home that you’re building. And I think that is an area where it makes this whole situation a little less painful, correct?

Speaker 3 [00:34:43] Yeah.

Speaker 2 [00:34:43] Yeah, yeah. I mean, John, you know better than I what is going

Speaker 3 [00:34:47] on with home values. Certainly the closer in towards D.C., the more pressure, the more home values are increasing.

Speaker 2 [00:34:58] But it is

Speaker 3 [00:35:00] a crazy

Speaker 2 [00:35:01] time and people’s equity

Speaker 3 [00:35:03] is are just going through the roof. Yeah, I mean, it’s it’s a great thing. It’s certainly painful

Speaker 2 [00:35:09] that

Speaker 3 [00:35:11] that there’s a potential that the price would go up based on the lumber market,

Speaker 2 [00:35:16] but also the cost of money

Speaker 3 [00:35:19] is very inexpensive.

Speaker 2 [00:35:22] So I’m not downplaying the

Speaker 3 [00:35:24] the current

Speaker 2 [00:35:26] situation with the pandemic right.

Speaker 3 [00:35:28] In the home surge.

Speaker 2 [00:35:29] But certainly it’s you know, we still think it’s a win.

Speaker 3 [00:35:34] Obviously, it doesn’t matter what we think.

Speaker 2 [00:35:35] It’s a customer that has to do the analysis. Yeah.

Speaker 3 [00:35:39] And decide if it makes sense for them. Yeah.

Speaker 1 [00:35:41] I mean, based on the market activity that we’re seeing right now, it sure seems like there are lots and lots of people out there that that feel the the the costs are going to continue to go up and the value is going to continue to go up. And they’re rushing to get in to get their their home built as quickly as possible so they can take advantage of the scenario that exists today. You know, by

Speaker 2 [00:36:05] and you know, John, interestingly, I’m

Speaker 3 [00:36:08] looking at various reports through through the industry where you would

Speaker 2 [00:36:14] expect home building to be looking and saying, OK, what does this look like

Speaker 3 [00:36:19] after the

Speaker 2 [00:36:20] pandemic and how companies

Speaker 3 [00:36:23] are looking at their their whether or not people need to be

Speaker 2 [00:36:30] in the office

Speaker 3 [00:36:32] or at home.

Speaker 2 [00:36:34] And what I’m saying is at least

Speaker 3 [00:36:39] based on current day. Is there is a very, very large percentage

Speaker 2 [00:36:45] of of companies

Speaker 3 [00:36:47] that are certainly going

Speaker 2 [00:36:49] to do a

Speaker 3 [00:36:52] part time

Speaker 2 [00:36:53] in the office, part time home, and I think it’s you know, it

Speaker 3 [00:36:58] depends on the industry and whatever I can say from from Stanley Martin, custom’s perspective. Right. I have a great employee who lives in Texas. I have a great employee who lives in North Carolina. We do everything through teams

Speaker 2 [00:37:13] and

Speaker 3 [00:37:14] everything’s on the cloud so we can manage everything. Right. There’s no reason it’s so odd that this paradigm shift has really taken root on how people are are working. Yeah.

Speaker 1 [00:37:27] Today, I mean, it’s interesting on your team. So I have a great employee who lives in Richmond and I have a great employee who lives in California and I have a great employee who lives in Florida and one who lives out in Mount Jackson, Virginia. So our whole team is spread all over the place. And, you know, we’re doing everything remotely. We were doing a lot of things remotely before. You know, I think our California and has been with me for I mean, on and off for 15 years. She’s been with us for a long time. And when she initially moved to California, the cloud hadn’t really evolved. But she came back a few years ago and we had our system down and it just pushed us all into that remote space that we already had created, which was fine. It really, if you think back and I think we talked about this on an earlier episode when the pandemic first hit, we flipped a switch and we were able to we were able to just continue working from from day one.

Speaker 3 [00:38:32] But it is kind of interesting because look at how much more efficient our customers time is in our time. Yes. Yeah, right. Where customers used to drive out to our office.

Speaker 2 [00:38:42] We just don’t do it anymore. Well, not

Speaker 1 [00:38:45] that. I mean, it’s it’s it’s it’s amazing how you can share your screen and design the plan while the customers are watching. Right.

Speaker 2 [00:38:56] Where before you

Speaker 3 [00:38:57] do that, before

Speaker 1 [00:38:58] you would we would meet with the customer in the take some

Speaker 2 [00:39:00] notes and sketch things,

Speaker 1 [00:39:02] see the the table. And I would tell stupid jokes for twenty minutes how you came up with a sketch and then you would present the sketch and then you would get their feedback.

Speaker 2 [00:39:09] This is so much better now.

Speaker 1 [00:39:10] It’s all in real time. Yeah. You know, it’s you’re drawing a change to a closet and you instantly hear, oh no, no, I don’t like that. Oh yeah, I love that. Right. So the whole process that we’re going through now with with the new situation is just so much better for our customer. Our customers don’t have to get child care. They don’t have to take thirty minutes, drive into the meeting and thirty minutes back we can pop in. We can get it done. It’s really amazing.

Speaker 3 [00:39:35] Yes, absolutely. Absolutely. Yeah, it’s just it’s great.

Speaker 1 [00:39:38] So so that’s some of the good news from from the pandemic. So I think I think in closing, I would say we’re going through a difficult time. I think you and I have had hours and hours and hours of offline conversations about how difficult this whole situation is for everybody. It’s extremely difficult for our customers. Yeah, they got hit with this dart. And I know you and I have both lost a lot of sleep over this. It’s also difficult for you and me, albeit not nearly as difficult as it is for our customers. And it’s difficult on our team. Right. There’s a lot of frustration in general because of of this situation. I think we’re all working through it. And we we have a really great path forward. I think we’ve communicated as best we could to everybody who’s in our process now about what’s going on. And there’s lots and lots of good news behind what’s happening in the world. Right. The process of buying is easier. The process of designing is easier. And you’re still dealing with a great company, Stanley Martin and Stanley Martin, Custom Homes. And it’s and it’s large and and the security of knowing that your home will get built with quality when you build with a company like Stanley Martin. Custom Homes.

Speaker 3 [00:41:02] Absolutely, John. Yep. Pleasure talking

Speaker 2 [00:41:05] about this. And hopefully people take away

Speaker 3 [00:41:08] some good things from good deal seconds.

Speaker 1 [00:41:10] Thanks for coming in and having this conversation with us, Michael. Perfect.

Speaker 2 [00:41:13] Thanks, John. But.