Type the four-letter word "risk" into the Harvard Business Review website and the search will turn up 3,982 articles with the term as a primary point of focus.
What is it about risk that compels us to give it so much attention, and, at the same time heed it so little? Are risk and threat the same? Is some risk a good thing? Why is it so often said that home builders large and small are incapable of correctly counting risk into basic business calculations.
In a very recent example from the HBR knowledge trove on risk, a Harvard-based M.D., neuroscientist and author named Srini Pillay suggests that in today's high-velocity business context, we must think differently about thinking differently about risk. Dr. Pillay writes:
Is there a better way to think about risk, especially in fast-changing environments? I suggest three: 1) understand how the brain processes risk; 2) remember that risk-taking can be a good thing; 3) learn to become an expert at bouncing back from failure, thus taking some of the sting out of risk-taking.
How can it be that we'd swear to the fact that we encourage bold action--another expression for some measure of risk-taking--among our associates and employees, while, out of the other side of our mouths, we'd avow caution and conservatism as assurances among financial stakeholders?
Why this focus on risk, now, as housing's recovery shows signs--albeit spotty, choppy, and lumpy ones--of taking an ever-stronger hold across the land? The latest--April--Census report on new home sales showed a bounce, to an annualized 517,000 units, both a sequential and year-on-year gain. But, as Wall Street Journal staffer Kris Hudson reports, here's the rub:
New Commerce Department figures show that, after four consecutive months of slight declines, the median price of a newly built home in the U.S. rebounded by 4.1% in April to $297,300. That puts it back within striking distance of the all-time high of $302,700 set last November.
Now, what this note is not going to do is to say that home builders are raising their prices too much, too soon. What it is going to suggest is that home builders--not all, but some percentage--must take a risk on both land buys at gut-check prices and slim margins, the efficiency of construction processes, and the design of spaces and communities that will vastly exceed existing home values at competitive prices ... all in the effort to generate a magnetic force of urgency among buyers who want "in" to the American Dream of homeownership, where a new home eclipses the value of other housing options.
A few weeks ago, at our Housing Leadership Summit in Miami, keynote speaker Ivy Zelman spoke sharply about the role of an increased supply of new-home for-sale inventory at lower price tiers in sustaining the recovery.
We believe that, in aggregate, home builders' response to that challenge will factor into whether this housing recovery can find its next leg. Here's how Zelman illustrates part of that assertion.
So, let me ask you: is it a risk for a home builder to buy lots at a narrower margin, in outer-ring areas that God-only-knows whether growth, highways, schools, infrastructure, etc. will support those rooftops? Yes. Is it a risk to bet that you can line up trades, community managers, supers, and systems to go into those markets, build fast at a high quality, and sell those neighborhoods through? Yes. Is it a risk to take hard-won acquisition, construction, and development money and pour it into higher-volume, lower-margin communities where three-year pro formas show almost nothing to build a plan around? Yes.
But is it an even greater risk for the business not to take such measures? Would it be reckless of home builders to believe they can keep serving discretionary, well-heeled, low-risk buyers, without continuing to feed new souls into the pipeline of the American Dream.
Here's a fascinating affirmation of homeownership's unabated importance to an overwhelming majority of Americans' sense of well-being. It's from Eric Snider, President and Chief Research Officer of Lifestory Research, and it states unequivocally, that homeownership and the "pursuit of happiness," are intertwined in real, present, and critical ways. Snider writes:
Despite qualification challenges, Americans remain steadfast in defining the American Dream as including homeownership. Among the belief statements, we found that 78% define the importance of their American Dream as consisting of owning a home. We find that among those that actually own a home, that it is even more important with 84% of homeowners stating it was important. As this finding suggest, the attainment of certain features of the American Dream, such as owning a home, heightens the importance of the feature itself.
So, if you're risk-averse, do you hesitate on trying to meet that need, or do you go for it? Of course, the answer comes down to what kind of business you're running. But as an industry, there's no ambiguity as to which is the riskier proposition--action or inaction.