Marshall and Swift essentially provide "replacement cost". What it would cost, as a one-off deal, to build that particular home say after a fire.
I was never in purchasing at Pardee and the details of their contracts with suppliers were extremely confidential. But they did lay out the basics at meetings.
At the time Pardee used Pella windows. I'm sure someone here might be able to tell us what the retail mark-up over wholesale is on Pella windows - maybe they mark them up 20% to 40%, I don't know. That's what you would pay.
Pardee and other major builders are negotiating a discount from wholesale. Let's say we look at Pella's balance sheet and see that they spend 35% on marketing and 12% on G&A. Pardee points out that they don't need to pay for marketing, so that's a 35% discount from wholesale price right there.
Further more, Pardee offers to leave Pella window stickers on one of the windows in the front of each home for sale, and will feature Pella in their brochures. Pella normally pays for this type of co-op advertising expense, so let's say that's another 7% discount in lieu of co-op fees.
Now Pardee looks at their transpiration, packaging, and production runs. No need for fancy packaging and we'll take the entire production from a complete new production line, guaranteed, shipped full load at a time at Pella's convenience. That totals another 15% discount.
So we now have Pardee buying Pella windows at a 57% discount below wholesale price. Your local builder gets a 10% discount off of retail price which is say 130% of wholesale. So the local builder pays $120 for something Pardee buys for $43. Pardee gets a 64% discount compared to the Marshall and Swift price. Most of these numbers are a guess, but 57% below wholesale price was a typical real number.
Structural lumber was a bigger discount. Pardee is owned by Weyerhaeuser, the largest supplier of wood and wood structural wood products in the world. No price increase there, Pardee had essentially a fixed price contract.
What about those rising craft wages? Do you prefer working for the going rate, when you get called onto a job? Or would you prefer to work for Pardee at a set annual salary with four weeks paid vacation and medical coverage? Everyone knows that Pardee does an excellent job in keeping their employees on the job during downturns = and they stay for many years with very low turnover. I guess that increase in labor prices which show up in Marshall and Swift's numbers just don't apply here.
I costs a lot of money to buy mature plants, but they really add to the sales price. Pardee is well known for their landscaping, but they don't pay for mature plants. Pardee lays out the rough grading for the development and plants up front. As the development is sold over the next 18 years, you're building homes on lots with mature trees which have been in place for some time. Pardee's modular construction techniques can easily work around the landscaping. I worked on one California development which was a trash strewn valley with brown hills. After rough grading, the stream had been realigned 180 feet north to gain view premiums on both sides. The valley was filled with scattered oak trees and the hills bloomed with a profusion of California poppies, which marketing decided would be the theme for this development.
Large builders like Pardee or Centex are a great deal like Walmart, but they don't pass on the savings.
They price off of independent builders, what the small fry can turn out at a 4% or 6% profit margin. This means a big profit margin for a firm like Pardee. In the just issued Centex earnings report, they cite a 27% return on equity - I'm not surprised. If the large integrated builders eventually take over a larger part of the market, then I would expect lower profit margins as they compete against each other - but they set their prices by shopping the Mom & Pops.
. |
