Stuart Miller: To be able to understand and really get into the pricing model, you’d have to talk to the inimitable Jeff Moses, and he doesn’t talk to anyone. Keep it internally. But, do you want to go ahead and answer that, Diane?
Diane Bessette: It’s really an incredible tool, Truman, and we really should spend — and I’m happy to do that, I’m really happy to spend some time. It’s much more involved than you would imagine. It’s a home-by-home assessment, each home, each community, each market, and the tool looks — of what we’ve sold that exact plan for over time. And it also looks at the market competition for that plan in that community in that market. So, it’s a lot of detail, but the point is it truly gives us an unbelievable amount of real-time detailed information because that’s really the only way that you can price. We talk about it at a very high level, but pricing really is at a planned community market level. And it allows us to be really flexible when pricing is going up as well as pricing is going down. We use the tool in all market conditions.
Stuart Miller: And it is real-time available to the local market as well as to the corporate office and everyone in between. And so that connected engagement really enables us to stay close to the market, close to the pricing and very interactive at all levels of the company.
Diane Bessette: And react quickly. Yes.
Jon Jaffe: The other thing that tool does, you hear us throughout our strategies, talk about start pace and sales pace. This tool connects all of the dynamics and metrics Diane just referenced to that pace, so we can adjust in real time to make sure that we’re not ever getting behind the pace that we want to be at.
Truman Patterson: Okay. Perfect. And then any — I’m just trying to understand maybe the elasticity of demand with how much might be needed to move relative to some competitors nearby?
Rick Beckwitt: Well, as we said in the commentary, we’re constantly evaluating what’s going on with other competitors, what their inventory position is, what their pricing is, are they generating sales? And this is a very fluid conversation that Jon and I have with the regional presidents and the division presidents. We are all over this. And to the extent someone make a pricing adjustment and if we need to move something, we’re going to move it. We want to stay ahead of it and hopefully have them follow what we do. And there’s not anything that we’re really not familiar with that’s going on out there.
Stuart Miller: And it dovetails — all of this dovetails with our digital marketing focus. We have a robust digital marketing group with data science component that dovetails exactly with the dynamic pricing program. So, we’re generating — we’re generating the customer base and building the pricing that is going to appeal and creating the intersection.
Rick Beckwitt: And I think that the drop to mic or the proof in the pudding is, and Stuart mentioned that we’ve only got 900 completed homes in the Company right now. And in many ways, I would tell Jon, I’d like some more. Jon said he’d like less. We have our even flow and machine going and homes are being produced as we match them to sales, we’ve got the perfect amount of inventory.
Stuart Miller: Yes. And I’m going to say as long as you brought it up, we have 900 homes in inventory. We would actually be better with more of that standing inventory because of today’s customer is…
Diane Bessette: Premium.
Stuart Miller: Yes, it’s premium. And I’d want to emphasize one more time there were no bulk sales at discounted rates to clear inventory. And you don’t always trust what you read. So, let’s go from there.
Truman Patterson: Okay. Perfect. And then just on the vendor and contractor savings specifically, what inning of cost savings do you think we’re in today? And as of, we’ll call it, December 15th, are the savings primarily on the labor side, or are there certain materials, products, outside of lumber?
Jon Jaffe: Look, we’re clearly in the early innings because as the homebuilding industry is completing the fourth quarter of the year, you have for all builders really the largest production quarter, so labor has been — has remained very busy while the market has slowed down prior to the fourth quarter. And as Stuart noted and I noted, it’s — that’s why you typically always see a lag between sales prices moving down and then construction costs moving down. So, we’re clearly in the early innings of that. We feel like we’ve got tremendous traction. And as I noted earlier, I think we’ll see significant movement as we move through our first quarter, into our second quarter in terms of reductions. And that will happen primarily because starts have dramatically slowed within the industry.
We’ve kept our start level at a consistent pace. And so as that labor frees up, that brings the cost of labor down. But also as the starts come down, that creates more availability of materials for the manufacturing production. So, material prices come down as well. That also tends to lag a little bit more behind labor because it’s got a longer production cycle where labor is more immediate.
Operator: Our next question is from Alan Ratner from Zelman & Associates. Please go ahead.
Alan Ratner: Stuart, I’d love to drill in a little bit on your kind of industry-wide starts outlook for next year. My initial reaction when you kind of threw out down 30% was a little bit of a surprise. And I guess the way I’m thinking about it is, you guys are targeting a pretty flat pace for the year. Your largest competitor D.R. Horton has kind of articulated something similar. You guys are 25% of the single-family production market. There’s been a lot of other builders that pulled back very sharply this year on starts as they were kind of clearing through some of the spec they built up in the spring. But if you have said we see the advantages of spec. We’re going to ramp our start pace heading into the spring to kind of capitalize on that as well.
So, I guess, my question is, how do you kind of arrive at that number? And let’s say, for argument’s sake, the decline is less than that, let’s say, 10% or 20%. Does that impact your confidence on kind of getting the cost savings that you’re clearly expecting for the year and the margin guidance that you gave as far as 1Q being the low watermark?
Stuart Miller: So first of all, Alan, I’d say that we could look at some of the larger builders, and I’m sure that they’ll adjust their start pace and no one has fleeted the switch in industry, a lot of very smart participants. But there are some practical realities relative to smaller builders across the country. Remember, the larger builders are that we make a proportion. And the capital markets are complicated right now. It’s not just a question of strategy for some. It’s a question of what can you actually get started and how are the capital markets supporting it. I think that it might be only 10% or 20% or 30%. I don’t know what the percentage is going to be. My personal view is that it looks like many of the smaller builders are really pulled back, the complication of price reductions and what’s been paid for land and stuff like that.
The other side of it, which makes up about a third of production is multifamily. And the multifamily capital markets are very frozen up right now. I think that the number of new communities coming out of the ground for multifamily and even the single-family for rent buyers are kind of seized up because of capital markets considerations. So, let’s not even throw in strategy just from a capital market standpoint, it feels to me, can’t prove that, a very sizable portion of starts for next year are going to be under limitation. Now, if it ends up being only 10% instead of 25%, still, you’re looking at a housing shortage. I know that there are many with different opinions on this. I believe there’s been a production shortage, housing shortage across the country.
If you talk to mayors and governors across the country, their single biggest concern is workforce housing supply and affordability. It is a drumbeat that is in almost every major city and every state. And we feel that there is a shortage that is going to be compounded by the fact that there will be some production and reduction out of this and whether 10% or 35%, it’s still going to be short supply, and I think a more limited downturn.
