It was four years ago that I wrote my last By George! Column in October of 2010.
I have tried to detach myself from the everyday “in the business” concerns of home building and community development and the ancillary and related businesses so that I could take time to think about the “on the business” issues that owners, investors, executives, and policy creators should be considering.
As we know, cheese gets moved when you look away or don’t pay attention.
With encouragement from my long-time friend, John McManus, the Editor of BUILDER, I have decided that By George! will add its voice to the conversation again.
One of the first things I did was go back to the last piece I wrote to see how we have progressed from those dark days of 2010.
Sadly, much of the piece read like I wrote it last week. I have included the piece at the end of this one.
Some things have improved, to be sure, but the inability or unwillingness of buyers to purchase homes, including new homes, still provides a dead-weight to economic growth. A press release from the Federal Government recently about providing lower down-payment loans (3%) is the latest salvo in trying to jump start new home construction and the economy.
Probably not enough to make a real difference, the move at least can go in the category of at least some action attempting to make it look like someone is paying attention.
More relevant, perhaps, is a release from Freddie Mac on December 8, 2014, about attitudes among renters about renting and homeownership. The essence is that although 91% of renters view homeownership as something to take pride in, only 39% expect to purchase a home in the next three years. However, 45% of renters say they live paycheck to paycheck and will probably never be able to buy.
Whether we like it or not, our housing situation is looking more and more like the 1920’s than the 1990’s. Then, only 40% of the population owned a home and 60% rented. Many of those who rented paid a significant portion of their income toward rent and never could save enough to purchase.
Sounds more like where we are going, based on the trend lines of the past couple of years.
I will delve into the offshoots of some of these ideas and trends in future columns.
But, what I think should be considered currently is the thought that we may have had way more of a structural shift in the underlying factors that drove homeownership and the home building and residential development industries in the period from 1945-2007 than many have realized or chosen to accept.
The implications of such a shift for company business models, product, land values, and who participates in the industry are significant and not always to the good.
However, with every disruptive change comes both the opportunity to thrive in the new environment and the risk of sudden extinction.
Which side do you think you are on?
Now, the article from October of 2010: _________________________________________________________________________________________________ Making a Difference: Strategies for Today
Sometimes I think I read too much. When you read what others are writing it is easy to get caught up in the prevailing wisdom of the moment. I don’t know if I end up any wiser, though. All I know is that the media always seems to be six months or more behind what is really going on out in the real economy. Sometimes it just makes sense to walk around, talk to people, listen to conversations, and look at the data, too. It helps you to get a grip on what reality is and what ought to be done to make a positive difference for you or your company.
I think that is called strategic planning.
I look at the data on housing sales, starts, consumer confidence, the various builder sentiment indices, the various pricing tracking indices and all that stuff. What it seems to tell me is that we are bumping along at a very slow rate of both home sales and new home production. The headwinds to ownership are pretty formidable right now with the no-job blues, abundant foreclosures, and ever tougher mortgage underwriting standards cancelling out some of the best mortgage rates and home affordability metrics in over a half-a-century.
It is kind of like steak at 99 cents a pound, but the butcher won’t open the cabinet and sell you any and, even if he was willing, you are not sure you really want to buy. Maybe soup would be better for you right now.
So my operating presumption is that what we see is what we are going to continue to get for quite a while. Whether it is six months or six years, I don’t know.
What I do know is that there is some level of demand for shelter, that there is apparently an oversupply of for-sale shelter in many markets, that the rental market seems to be doing better as people either can’t or won’t buy housing the way they used to, and that there is a base level of demand for new single family homes at between 300,000 and 400,000 homes per year. This is one of the lowest production levels in the past half-century, but it is at least something.
If this is reality, you had better figure out how to make money in it, because it may not get much better for a while. The dream of it “coming back” soon now seems like delusion, at least for now.
So here are some observations and thoughts.
First, when I talk to some of my real estate broker friends, they continue to say that there seems to be a strong demand for rental single family houses. Whenever they get one, particularly in a good school district or a good neighborhood, they get rented at good rates and fast. That makes sense when you think about it, given the situation we are in.
Second, the same brokers tell me that there seems to be a deep demand from investors for houses coming out of foreclosure whenever they are available. Mostly cash purchasers, they seem to be happy renting them out for someplace between a 5% and 8% cash on cash return. That makes sense, too, given the rates that CDs and Treasuries are paying.
Third, in the better neighborhoods, the selling prices of new homes are now beginning to sell at the regular premium to re-sales, albeit at lower prices than 4 years ago and even though the resale prices are in many markets really the foreclosure or short sale prices.
So here is a question: is there a business model for builders to build homes and then sell them to investors who want to own rental single family houses? It seems like in some markets this might make sense, particularly when end sales are getting messed up in turbulent financing and negative consumer confidence when it comes to purchasing. I think that people still want to live in nice houses in nice neighborhoods and that, for a while, renting may be the preferred way for a segment of the population. The supply, demand, and sentiment for rentals seem to be lining up. It is a different business model, but these are different times.
I am not sure how the economics work in your marketplace, but in doing a back of the envelope analysis, it looks like it does in some.
Smartly delivering value to the buyers who are able and willing to buy is pretty important, too. I know that most builders have worked at value engineering and cost reduction strategies over the past couple of years. They have forced costs down as the selling prices have dropped. Yet, when I talk to people in a variety of markets, I am getting a feedback that it is not always the least expensive or the smallest homes that are selling.
Fire up the DeLorean, Doc Brown; what is going on here? I thought that the conventional wisdom was that starter and inexpensive homes was the holy grail of the new building reality.
I think that all of the number crunching and technical stuff forgets that you are still selling a home to real people and that sales and marketing really do matter. If you so value engineer a home that it is just pabulum and doesn’t excite, you haven’t added value at all in your efforts.
There are people out there with stable jobs and who want and need a new home. They are not all first-timers, either. I think that the government tax credit distorted what the true and unbiased market, small though it may be, really is. It is more diverse than many pundits think and if you hit their hot buttons perfectly, they will purchase.
I am watching Meritage’s move into a greener product line with great interest. They are organizing to be a leader in this area and the early results of the sales in communities where they have rolled out the new “greener” product are enough to make one sit up and take real notice. They are finding a niche that has importance to a certain customer profile and attempting to carve their company out as different from the pack by understanding that particular customer and delivering housing value to them that is not available in the multitude of foreclosures and distressed offerings on the market.
Similarly, I am seeing that both new home sales and re-sales in well-executed Master Planned Communities are doing better than the overall market, even though they are getting higher prices per square foot.
Again, it makes sense.
The social infrastructure, educational, and wellness programs that many of these communities have in common are important to a certain set of buyers.
People are willing to pay for what they value is the lesson. Figure out a customer profile, figure out how to deliver what they want, and you have the prospect of having a business that works in this environment.
It is harder work than the days of having a standard set of floor plans that really never exactly targeted anyone, but you tried to sell to everyone. That was a good strategy for a supply-constrained market.
The problem is that we are now in a demand-constrained market and will probably be there for quite a while.
Finally, I am reminded that people really do make a difference, particularly if they are encouraged to think creatively and then act on their insights.
In my article My Ten Lessons Learned from the Downturn from last June, I challenged readers to think about what they had learned and would like to both remember and to pass on to others. One response I think is right on the money and I would like to share it with you.
Diana Sanger is the Regional Marketing Director (Northwest) for Meritage and is based in the Sacramento area. She worked for me five years ago and always seemed to be a quick study, so it was not really a shock when her response came in and was very insightful and dead-on.
Here are Diana’s top ten lessons learned in the downturn:
1. Déjà vu. Just because a marketing campaign didn’t work one time doesn’t mean it never will. Open your mind and remember the market is constantly changing; that bad idea in a hot market might be an excellent idea now.
2. Look under every rock. Don’t ever forget to consider ALL 7 P’s when evaluating a community! If you don’t look at all the facets of a problem, you may spend money needlessly.
3. Builder Beware. Listen and respect your buyers. Never, ever take them granted.
4. Never say goodbye. Stay in touch with people you admire in the industry. You never know when you might end up working together again. It’s entirely worth the extra effort.
5. The first “NO” is not always the final “NO.” If you have a truly good idea, it’s worth mentioning—again.
6. Grow smart, not big. When expanding the division, keep in mind how tough it is operationally if you have one or two far-flung developments. They always end up getting ignored.
7. Focused. Turn away from the computer screen, put down the cell phone, and give people and meetings your full attention. We work hard and fast in homebuilding, but we must also be thoughtful and thorough. So slow down a bit. Plus, you won’t get burnt out so fast.
8. Dead-on. Do NOT promise deadlines you cannot deliver. Nothing deflates confidence, diminishes speed and efficiency or depletes team morale more quickly.
9. Mind over matter. Work experience does not necessarily guarantee a top-performer. I have hired sales agents with very little experience who learned quickly, hungered for more and became top performers in no time.
10. You. Attitude is everything. Set the example yourself. Don’t get bitter about the past few years and instead be positive, learn from those around you and always look for ways to improve.
I told Diana she got an A. She was thinking and learning and, in speaking with her recently, she was applying the lessons every chance that she could. She was making a difference.
People do make a difference; particularly people who interface directly with your customer. These are usually your sales and marketing folks. If they are not the best that you can find; if you are not training and motivating them daily; if they are not out in the community on the weekday mornings and in the office every day of the week either calling, emailing, writing, or meeting customers and brokers, then all the other work that you do in the company is for naught.
A great sales person can really add value; oftentimes way more than the costs that you thought you took out of the house by “value engineering”. They can sell at full price if they understand how the product is unique, the target customer profile that is unique for that home design, and, most important, if they truly believe in the product, the community, the company, and their leaders.
It is a beautiful thing when it all comes together. But, as leaders you have to make sure the product uniqueness is really there, that your sales people are truly the best, that you value their work and recognize them for it, and that a positive attitude is the norm, not the exception.
So, how do you and your organization stack up? Do you have a Diana working with or for you? Are you doing something that is truly different and unique and meaningful for your customer? Do you really know who your target customer is or should be?
If you do, you will have begun to figure out how to adapt to this current environment and to make money in it.
And that is a strategy that will make a difference.