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FTQ360: Is construction’s bear market actually a good thing?

As founder and CEO of www.ftq360.com, Ed Caldeira helps lead quality improvement in the construction industry... "When the construction industry is in ...

Ed Caldiera
|Sep 22|magazine9 min read

As founder and CEO of www.ftq360.com, Ed Caldeira helps lead quality improvement in the construction industry...

"When the construction industry is in a bull market, profit margins are high and companies don’t need to operate at a high level in order to make money – many make money in spite of deficiencies and poor performance. This environment attracts many newcomers, until the industry is busting at the seams with companies that wouldn’t otherwise make it in the construction business.

In a bear market, profit margins become slimmer, and there’s an added pressure on companies to perform in order to make money.  This market drives low-quality companies out of business, which is good for two reasons:
1) The industry undergoes a sort of cleanse, leaving the highest quality builders and contractors in business and driving out many of the bottom feeders.
2) Most significantly, in the wake of a skilled labour shortage, when low-quality businesses are driven out of business, their workforce is redistributed to companies higher-quality companies that are able to train and manage them properly.

What a bear market means for construction pros: 1) better pricing from contractors because competition is higher and profit margins are lower, 2) better quality due to the natural cleanse that occurs in a bear market, 3) an increased opportunity to capture market share. 

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Businesses that make it in a bear market are those that don’t waste resources, build right the first time and don’t spend unnecessary dollars fixing preventable mistakes. Whether in a bull market or a bear market, there are real benefits to quality and performance in the construction industry. In a bull market, this approach only adds to profitability. In a bear market, first, it’s nice to have, then it becomes essential to survival."

Supporting data: 

Declines in Lumber Liquidators and American Woodmark pushed the Home Construction exchange-traded fund (ITB) into bear market territory, down more than 21 percent from its 52-week high notched in January.

Many of the stocks that make up the exchange-traded fund index for homebuilder and construction stocks have fallen more than 50 percent in the last several months.

Commodity prices are starting to increase both because of higher demand and the Trump administration’s tariffs. These make houses more expensive to build and the construction companies are not always able to pass these higher costs on to the consumer in the short run.

With a dramatic increase in land and building supplies, home manufacturers are hesitant to commit to large-scale projects unless fairly certain they will sell at a high price point. Many still remember what happened before the financial crisis when they were stuck with massive inventory when the market turned.