Navigating Inflation Impacts, The Ultimate Hedge Is Value Creation
Private-sector residential real estate and construction leadership's fever-pitched focus is on inflation, its potentially corrosive effects, and hedges their organizations and stakeholders might invest in to reduce risk and sustain strength as volatility runs its course.
Who's willing to bet on The Economist's Feb. 2nd cover as a contrary indicator right now?
Inflation trends are whipsawing through decades-long high-water marks, and show no sign of relenting. In fact, they'll get worse before they get better.
- Check out TBD Dream Teamer Craig Webb's report this morning on a baker's dozen of direct impacts to builder costs of chronic, pandemic era, and, now, Ukraine war-related supply disruptions, all of which bode mounting challenge ahead for the flow of building materials and products goods to construction job sites.
From one vantage point, four generations of team members and two to three generations of strategic leaders have never led, managed, operated, nor paid the bills in times like now.
The rise in inflation meant worker paychecks fell further behind despite what otherwise would be considered strong increases.
Real inflation-adjusted average hourly earnings for the month fell 0.8% in February, contributing to a 2.6% decline over the past year, according to the BLS. That came even though headline earnings rose 5.1% from a year ago, but were outweighed by the price surge.
It's uncharted land and seas, which is why the volatility indices are swinging like a weather vane in a storm.
What better hedge to an indefinite stretch of runaway costs – to businesses, to their partner ecosystems, and to you and me sitting at the kitchen table – than value, enduring and indomitable value?
Uncertainty has now maxxed out. Now, doubt starts playing a part in psyche and behavior, morphing what have been virtuous cycles into vicious circles. The continuum spans from uncertainty, to doubt, to threat, and along that continuum, confidence in machine-learned algorithms that modeled soft landings and speedy rebounds starts encountering bumps and bruises.
We reflexively recall like it was yesterday the "things will never come back" fetal position many builders and their partners were in starting in 2007, and only began to emerge from in 2011.
So, to the question bearing down on every person who's part of that intricately-layered system of matrices that make up the people business that is real estate and home building's chain of command, of motivation and morale, of focus and productivity, of problem-solving, of pride-of-purpose, and of simple satisfaction of a job well-done, is where and what is the "hedge" to inflation?
Value.
- And if that value means more than, say, a $55,300 gift-wrapped equity gain that homeowners averaged nationally by the fourth quarter of 2021, then that's the value leaders in homebuilding, investment, development, and building products and materials should be shooting for generating right now as a hedge.
- And if that value means more than workers' "headline earnings [increase of] 5.1% from a year ago," then that's the value leadership should be zeroing in on as the hedge to inflation.
Here, from Pew Research is the tell on that second critical hedge to builders' input cost inflation right now:
Majorities of workers who quit a job in 2021 say low pay (63%), no opportunities for advancement (63%) and feeling disrespected at work (57%) were reasons why they quit, according to the Feb. 7-13 survey. At least a third say each of these were major reasons why they left.
Roughly half say child care issues were a reason they quit a job (48% among those with a child younger than 18 in the household). A similar share point to a lack of flexibility to choose when they put in their hours (45%) or not having good benefits such as health insurance and paid time off (43%). Roughly a quarter say each of these was a major reason.
A "flight to quality," you see, is not just an investment strategy. It's a driver of livelihood migration, a work-force's thirst for yield, a collective mapping to value when costs in all their colors and intensities start to run out of control.
When flight-to-safety "safe haven" hedges draw so many to an investment focal point, an alternative priority for leaders – and one that will matter not just for now, but for the longer haul – will be to recognize the "safe havens" for your consumer buyer and renter, and for your team members. Business self-preservation will come via staying aligned with customers and associates, not cutting the cord with them. It's their experience of the corrosive effects of inflation that will impact builders' and their partners' business most over the next foreseeable stretch.
That's an opportunity.