The original Star Trek series ran on TV from 1966-1969. I always loved the idea in the series and its follow-ons that there was a transporter that “beamed” someone from one location to another, giving rise to the phrase “Beam me up, Scotty!”
In my prior articles (“Back to the Future…Again” and “Deja New”), I have been pondering the concept that the new normal we are experiencing looks more like the 1960s and 70’s (and sometimes the 1930’s) than the period 1990-2005.
If so, perhaps we should understand what some of those times looked like to maybe have clues to the coming future.
Several readers contacted me after the last article to ask more about what those prior times looked and felt like. It seems like there is little appreciation for the history of the residential shelter business prior to 1990.
So, beam me back, Scotty!
One of the easiest ways to understand this history is to look at the creation of residential shelter inventory over time. Although the data is somewhat mixed (using single family and multifamily permits as the proxy for the creation of field-manufactured residential units and using manufactured home placements as the proxy for factory-built inventory going onto the ground), it is probably as good as it gets. Over time, these form the basics of what we create for housing for the population.
Although what sells is oftentimes different than what is produced, sooner or later things even out.
A couple of things jump out when you look at the absolute numbers:
- An average of 832,000 units per year in the 2010’s, with an average US population of 312 mm, compares to the next lowest production of 1,398,000 units per year in the 1950s, when the population averaged about 175mm people. That’s 40% less units on 78% more population!
- Manufactured housing’s share of production is back to where it was in the 1950s. During the 60s through the 00s, manufactured housing accounted for 14-18% of total production and typically 200-300k units per year of mostly affordable housing, both for-sale and for-rent. That supply is now hovering around 50-60k per year. No wonder affordable housing is scarce compared to what we have known.
- Multifamily’s heyday was in the 60s, 70s and 80s when the baby boom was just getting out of high school or college and into the labor force. 350-600k units per year was the norm and multifamily was 25-30% of production.
- The multifamily trend slowed down in the 90s and 00s as the baby boom matured and preferred single family houses and were encouraged to do so by government policies and financing availability that supported single family residences over multifamily. We know how that turned out.
- The 2010s show a fascinating trend. Each year, the proportion of single-family production has declined and the proportion of multifamily has increased. Manufactured housing’s contribution has remained essentially flat. There has been no turn back to the ratios of the past 20 years, yet.
- Even though the actual number of residences created has increased each year throughout the 2010s, the mix continues to tilt away from single family to multifamily, at least up through 2014’s preliminary numbers.
- The absolute number produced is still considerably less than most any time over the past 65 years.
All of this suggests that the return to the “normal” that most of us remember pre-crash (the 90s and 00s) is not happening yet. If anything, the production landscape looks more like the 1960s, with multifamily production taking up some of the share that manufactured housing used to have.
My simple-man’s view is that, until we see a reversal in the production proportions, with single family and/or manufactured showing consistent gains in share and multifamily showing loss in share, what we have been getting recently is what we will continue to get.
In this “new normal”, the attractiveness and economics of multifamily rentals will continue to be strong while the prospects for single family for sale will still be generally weak. (The regular comment that all markets are different applies here. There will be some markets that will buck the trend based on local conditions.)
Looking at recent earnings reports from the public single family builders and their commentary seems to bear this out: lower volumes than anticipated, margins under pressure, the re-emergence of incentives and spec homes, and questions about land valuations for deals done in the recent past and the potential for write-downs and write-offs beginning to enter discussions.
All of these are symptoms of an industry with too much supply and capacity and too little demand.
What does not appear in any of the data for single family starts is what part of that inventory is ending up in a pool of single-family for-rent. In a world where there still seems to be more demand than supply for multifamily rental product, one would think that some of that demand has to roll over to new single family for-rent product, but the data is hard to find.
What is also interesting is that the analysts are now picking up on the fact that Toll Brothers and Lennar are developing a capability in the multifamily arena. Even though not much has hit the income statement yet, analysts are now seeing the wisdom in multi-platform operations that take out some of the wild cyclicality of the pure single-family for-sale business.
My personal operating hypothesis is that the echo baby boom (GenX and GenY) are taking longer to launch into the housing econosphere than many thought and for a variety of reasons that are becoming more and more evident.
Although the tailwinds of demography tell us that they all will need roofs over their heads, the composition of those roofs is looking like it will be different for a while and it will look more like the days of the 60s, 70s and 80s rather than the 90s and 00s.
For builders who can accept this reality, I believe that the less-risky business model is one that embraces the production of both for sale and for rent homes and communities and both single family and multifamily units in a variety of configurations: single person, single with kids, multigenerational, married with no kids, homes with attached and detached apartment for relatives or to rent out on AirBnB, and the list goes on.
What I do know is that the variety of living combinations is way more complex than it was in the 60s, 70s and 80s and that the used housing inventory out there does not address these modern situations very well.
If Deming was correct in his observation that: “In God we trust; all others must bring data” and the data says that what we are seeing now does not look anything like the 90s and 00s, then, as business strategists, we must think about how we organize and what markets we should serve.
Our trip back to look at the past should tell us it is different than it was in the recent past and the trend line, at least for now, does not show a return.
Accept the fact that it is different and that there is a new form of demand and embrace it. Something different needs to be done, unless you want to be counted with those timid souls who cannot or will not change to fit the new reality and suffer the margin and return consequences of that myopia.
I have often said that: “Organizations tend to do the things they are organized to do.”
If you are still organized to be a single-family for-sale builder, I believe that it is going to be a tough go for you for a while.
However, if you see opportunity in these new realities of the ways that people will choose their shelter, then it might take a new organization, new people, a new strategy and new leadership to capitalize on that opportunity.
Are you up to it?
Ok, Scotty. Good trip.