Duration and depth -- phrased as questions – arise inevitably at times like now.

Less appreciated, perhaps, are large variations of financial impact – inflicting more or less pain – depending where and when homebuilding construction, distribution, real estate, manufacturing, and lending partners tend to come directly into play during homebuilding's natural lifecycle, from pre-permit to settlement.

We know that almost universally the natural building lifecycle got a good hard knock into abnormality in Spring 2020, as building materials, products, installation services, and human supply chain dysfunctions set off by COVID-19, the weather, and ongoing labor inadequacies continue to squeeze cycle times out longer and longer.

Schedule delays -- elongations – commonly extend 60 or 90 days beyond normal start-to-completion construction cycles. As hard as builders have worked to re-secure schedule visibility, predictability, consistency, and reduce the time it takes to get a new homeowner their keys, word still is "we're not there yet, but soon."

This phenomenon and what happens to it next matters. It affects businesses this year, and in 2023, and very likely 2024. We'll get to why after a brief set up of context here.

How long a time lies between now and the moment housing's long-term trajectory regains its footing on the solid ground of low availability and intensifying demand – maybe even with a helpful nudge from the Fed?

That measure in weeks, months -- maybe more – as well as its related measure of peak-to-trough depth is every homebuilding business' moving-target in-year re-projection and reforecast challenge.

Even though it's a swiftly changing calculus, what builders need to do to shore up their own businesses, and how that directly and indirectly bores into the business outlooks of their countless going-concern supplier and vendor business partners across the real estate and building lifecycle amounts to a Leading Economic Indicator in flux. Hardly an exaggeration given that residential investment and related consumption spending account for up to 18% of GDP.

Here's how LGI Homes chairman and ceo Eric Lipar characterizes what-was-then versus what-is-now versus what-will-be.

After a two-year boom market unlike any other in history, the housing market sits at a pivotal moment. The short-term view is that homes are more expensive, consumer prices are up, and mortgage rates have nearly doubled. However, the longer-term outlook reveals a solid foundation for multi-year growth. Demographic trends remain supportive of demand, strong labor markets are fueling wage growth, tight rental supply is pushing up rents, and the inventory of homes available for sale remains historically low."

Tucked into that high-level outlook are the here-and-now realities that set in as rates of change across all the fields of a given firm balance sheet – small, medium, large, or Fortune 100 -- go kerflooey. Net variations to budget, and all the hard work of bringing as many variable costs down in line with freshly-projected money coming into the business in timeframes that keep lenders, investors, employees, and principal owners paid properly and on time add up to a massive reset while moving at full tilt.

Lots of attention these days focuses on the impact interest rate fluctuations – largely upward – are having on buyer prospects, either committed through earnest money orders and counted as backlog, or still  yet to commit. Higher cancellation rates and slower order rates have triggered a gamut of tactics builders are trying to both secure their backlogs and reestablish a new run-rate for absorptions across all of their actively-selling communities.

As the Fed has deigned necessary, a constellation of housing and consumer behaviors needs to re-mark-to-market at transaction levels that dis-inflate the value-stream in housing.

That catches us up to where we are now – somewhere in the in-between of the Fed's first play to pounce on inflation and of what will later likely be a Fed play to re-ignite a contracting economy by stimulating home purchases. Ironically, we have to be here to get there.

Meanwhile, as demand for new homes slows builders tend to lean hard into their variable costs. They cut down on the number of permits they pull, they'll pull back on starts until they've got a handle on a market-clearing set of price points that allows them to reboot their price-pace models.

Order backlogs, you see, are not only good news for homebuilders as a visibility dashboard into the future. They're also music to vendor and suppliers' ears, as they stand for price negotiation strength based on those visible volumes of earnest-money orders.

As homebuilders cut back on the number of starts, two by-products of the reduction occur. One, is that they may start looking to re-term lot take-down schedules within current agreements to defer costs that come with every take-down. If the depth measure sinks below what they currently expect, in some cases, they'll walk away from earnest money down for some of their controlled lot pipelines, and may even cut their losses by walking from land deals they've pegged to buy to avoid carry costs.

As each homebuilder seeks to navigate their own version of a soft landing, many had amped up the number of specs they started earlier this year partly so they could time their completion with buyers desiring full-visibility on closing dates, interest rate lock-ins etc.

Now, however, as builders more and more widely shift their share of spec-vs.-build-to-order in favor of the build-to-order side of the equation, a pivot occurs that carries night-and-day difference in business impact to vendor partners, depending on where they come into the build cycle.

The chief executive one top-40-ranked homebuilder wrote to us this week:

If build times are reduced by 3 months, back to normal, housing starts correspondingly will shrink by 25%. That will have a huge impact on front-end contractors/suppliers/land developers. Flooring and landscaping at end of construction process won’t be impacted by this."

Here's why this is the case, and why it matters. In an all-out push to get in-year variable costs in line so that full-year profitability, debt payments, and other obligations get met, builders are going to be sharpening their pencils and looking for every cost measure they can possibly cut.

Part of that gets accomplished by cutting starts. Part of it by aggressively wresting cost concessions from vendors where-ever possible – for example, we've gotten word one top 5 public builder has notified vendors it's looking for a minimum 10% unit cost cut on a go-forward basis as a requirement to continue as a partner.

Many of those concessions may or may not be achieved in 2022, considering that vendors' own input costs increased, warranting moves to pass along their own price increases to builder partners.

What our homebuilding executive friend is getting at is that among back-end trades, the ones builders really need in order to get homes completed and ready for settlement, homebuilders have less leverage to demand price reduction. Unit prices on materials, product, and labor, then, will be stickier while the backlogs are still robust and builders are intensifying efforts to turn them into closings.

For all the new orders out in front, mostly impacting partners at the front-end of the build cycle, builders get an upper hand in negotiating price. With fewer orders and fewer speculative starts vendor firms had better be in a position to pass along at least some of their own variable cost savings and leaner operations if they want an ongoing spot on a high volume builder's roster of solutions providers.

This front-end and back-end supplier impact effect will hit front-end players in early 2023 and back-end vendors – the finishing trades, cabinets, flooring, lighting, landscaping, etc. – will feel that punch hardest right during negotiations later this year, or early next impacting their business most in 2023-24. We'll see where backlogs stack up then as a proxy for who has greater leverage on prices and costs by the end of 2023.

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