Money Ball builds homes more profitably

“Pitchers and catchers reporting.” There may be no sweeter four words in the English language when they are assembled in the preceding phrase. Along with the indomitable Punxsutawney Phil, the start of spring training is a harbinger of Spring, bringing with it the promise of longer, warmer days, the possibility of renewal (technically the Phils have not been mathematically eliminated from the playoffs yet) and knowledge that it won’t be too long before you’ll be able to knock off work on a Tuesday, head to the ballpark with your buddies or your family or just by enjoy grown men playing a kids game and escape the daily grind for a few hours.

But like all things, baseball is not 100% pure. Through its long history, baseball has had its share of cheaters, scandals and embarrassment. It has even had an entire period of years that are now forever tainted with the moniker “The Steroid Era.” It was the 1990s, and baseball was emerging from its latest and most damaging work stoppage, which resulted in the 1994 World Series being cancelled. The game needed to make a comeback; it was looking for a spark, a flicker, just about anything. Along came the long ball: Mark McGwire vs. Sammy Sosa, Barry Bonds vs. Everyone, Brady Anderson, hitting 50 home runs (look it up) and everyone got on board, at least for a few years.

While the total impact of “The Steroid Era” goes well beyond the numbers, in this article, I’m going to focus on how the inflated numbers that players, owners and fans became accustomed to between 1994 and the mid 2000’s and make the comparison to similarly inflated numbers from the housing market of the early to mid 2000’s.

In order to keep this article mostly focused on housing and not baseball, I will only present a couple of compelling statistics from “The Steroid Era” that illustrate how absurd the numbers really were, and how they have begun to revert back to the norm following the advent of the aggressive testing and penalty regime that baseball first adopted in 2005 and has continued to modify to respond to changing strategies by dopers.

Isolated Power (ISO): this statistic measures the batter’s raw power by taking his Slugging Percentage and subtracting batting average, which essentially removes singles from the metric. From 1996 to 2005, which encompasses the heart of “The Steroid Era”, 7 of the top 10 league wide scores in MLB history occurred. The other three in the top 10 occurred in 2006, 2007 and 2009, when it could be argued that the testing regime had only just begun to take hold.

40 Home Run Seasons: 27% of all 40 home run seasons in the 100 year-plus history of Major League Baseball occurred in the six seasons between 1996 and 2001.

Total Home Runs Per Season: Between 1996 and 2005, the average number of league wide homeruns per season was 5208. The average between 1980 and 2014 is 4262.

Now that “The Steroid Era” is over, pitching, defense, hitting for average, stealing bases, moving the runners over and all of the age-old nuances of the game of baseball are the difference between winning and losing again. It should come as no surprise that the teams who are built for the long ball are struggling to win in the post season, while the San Francisco Giants, the prototypical “small ball” club have won three of the last five World Series Championships.

In the housing industry, we essentially had our “Steroid Era” as well in the early 2000’s through 2006 or 2007. Interest rates were extremely low, banks were willing to extend credit to consumers with little to no verification, and home building companies were able to borrow using low rates to purchase land and to finance construction. As we all recall, the numbers associated with the results of housing’s “Steroid Era” were just as exceptional for this industry as the baseball numbers were. While all segments of housing boomed during this time, one key segment provided a significant base of volume at the bottom of the market: the entry level home buyer. In 2005, first time new home buyers contributed more than 600,000 units.

In the recovery, the entry level buyer has lagged other categories in returning to the market. The reasons are numerous and relatively straightforward. Unemployment and underemployment has hit the 25-35 year old cohort very hard. Mortgage financing, even with historically low rates, has been very hard for first time home buyers to find. Higher down payment requirements, more stringent income verification and less aggressive government underwriting also combined to keep the participation low for first time home buyers.

Another less publicized factor keeping first time buyers out of the new home market has been the land positions and strategies of the majority of builders. Coming out of the downturn, most buyers were in various prior home owner categories. Builders adapted their land, product and sales and marketing strategies accordingly. In most top markets, the competition for land among large well-funded public and some private builders drove land prices higher. As the economy has brightened in recent years, and lending conditions have improved, new home buyers have not found an abundance of new homes that fit their budget or location parameters.

There is strong evidence lately that they are coming back into the market but are doing so by purchasing existing homes as their owners begin to put them on the market. This should indirectly provide a boost to the new home market as a number of these prior owners will move into new homes. However, this will not affect the entry level buyer.

For the builder that views the first time home buyer as a key target, the game has also changed. During housing’s “Steroid Era” builders were able to get away with some sloppiness in operations due to a number of factors. Many builders carried significant inventory of low cost land into the housing boom. At the beginning of the expansion, this allowed them significant flexibility and leverage in terms of what product they chose to put on that land, the efficiency of their buy out, operational productivity and quality of their trade partners.

Also, as the boom gathered momentum, house pricing rose faster than costs. This allowed builders to continue making acceptable or even exceptional margins across all of their product lines, even the entry level. In today’s market, these factors are not present: there is cost pressure on most trade categories, land prices continue upward, builders are in the habit of allowing significant customer choice, production cycle times are too long and there is too much waste in processes and procedures.

Just as the San Francisco Giants have won three of the last five World Series championships by playing a brand of baseball that requires attention to detail in all phases of the game, is committed to pitching and defense and utilizes a classic “small ball” approach to offense, home builders will have to readjust from their “long ball” games from the early 2000’s in order to succeed with the entry level buyers of 2015 and beyond. So as home builders consider re-entering this foundational market segment again in 2015, here are a few operational realities of housing’s “Post Steroid Era”.

How to Play “Small Ball” Top 10 List

1. Drive the market research and land evaluation process with realistic product, pricing and costing assumptions, clear roles, responsibilities and accountability.

2. Know your customer: size of segment, demographics, psychographics, submarkets, price points and product needs.

3. Deliver clean, flexible, low cost and easily constructible product.

4. Attack and minimize “Sale to Start” cycle time.

5. Scheduling system must provide accurate, real-time visibility to trade partners and suppliers as well as internal staff.

6. Make Material Management a critical discipline with the dual goals of optimizing margins and eliminating time wasted while waiting for additional material to be shipped to the job.

7. Engage Trade Partners in a collaborative fashion and develop incentives that align all interests towards executing efficiently, with high quality and on schedule.

8. In the context of #4, aggressively and ruthlessly attack Start to Completion (of construction) cycle time with a collaborative and motivated team of builders, trades and suppliers.

9. Eliminate Punch Lists.

10. Commit to the market. Partial effort and incomplete execution wastes time and money and only leaves you further behind your competition.

The final “Small Ball” key is probably the most important. It is also the most difficult for most builders to follow. Our industry has been an opportunistic and entrepreneurial business from the beginning, rewarding those who are able to react quickly to take advantage of deals that might not perfectly fit their capabilities but were “too good to pass up.” Of course, the building industry is also full of examples where similar decisions made by similar companies turned out badly, leading to lose money and in many cases, lost companies.

The first time home buyer category in 2015 and beyond demands a long term commitment from builders who expect to receive appropriate returns for their investment of time and resources and for the risk they incur in this segment. Think about the San Francisco Giants organization again. They began to lay the ground work for their long term success by investing their time and resources in identifying and acquiring the talent that aligned with their commitment to winning by playing a totally different style from the one that took them to the brink of World Series success in 2002. Success was far from a sure thing when they committed to that path but three World Series championships later, they have received their rewards.