As a builder, you are about to face—if you aren't already—one of the most challenging and stressful periods for the industry. New-home sales are plummeting in many markets, with some cities down by as much as 50 percent. It is believed few areas of the country will escape this downturn. Should your business strategy be to fight it? Or, is flight a better option, which could offer you a chance to retrench and survive?
Let's briefly review history. For years, home building markets ran in six- to seven-year cycles—from boom to bust to boom. But 14 years ago, that cycle changed—and for these last 14 years, the U.S. housing market has been in a boom cycle. It has been the best of times with only a few exceptions, most notably Denver.
CHANGE IS IN THE AIR In March 2005, at The Presidential Seminar in Aspen, Colo., builders received cautionary warnings. The signs of a possible, almost predictable, downturn were there. At the seminar's conclusion, builders were asked, “What do you see for the future and what will you do?” Their answers were interesting and were divided by age group. Older builders (over 45 years old) expressed caution. Younger builders, who had never experienced a housing recession, thought the boom would never end. One of the most successful young builders in the group requested a program at the 2006 Presidential Seminar on what happens in a downturn. He said, “I just don't know what a downturn is!”
NATURAL REACTIONS Recent events in the home building industry reflect Walter Cannon's theory of “fight-or-flight,” first published in the 1929 American Journal of Physiology. While he was describing how animals react to stress or danger, this theory was eventually applied to man under stress or danger. Yes, the home building industry is in stressful and dangerous times. How each builder handles these challenges will dictate the future of the company.
Some builders will manage through these tough times. They will find great opportunities by “playing the down cycle.” Others will not fare as well, and many will see their businesses fail. The builders most at risk are those that have too much financial leverage (debt) and weak organizations (people). These builders have been living on a market driven by eager buyers, investors, and never-ending optimism. Plus, they have too much land, spec inventory, ineffective people, cumbersome processes, and poor decision making.
For some, it is too late. For others, there are proven strategies that will bring long-term success and increased market share. The “name of the game” is building for the future.
The two proven components of a successful strategy in a down market are increasing market share and building the future organization.
INCREASING MARKET SHARE In a growing, booming market, a builder will actually lose market share as competitors, both public and private, flood the market. In recent years airline pilots, real estate agents, and physicians, to name a few, have entered the home building business, each taking a share of the market. In a down market, these people choose “flight” and leave the business. The strong builder takes advantage of the downturn and picks up market share. When good times return, sales sky rocket. (See “A Bigger Piece of the Pie,” right.)
Question: How do you pick up market share in a down market? Answer: You need a great salesforce with a strong management team and salespeople who have significantly different work habits than most.