In 2004, the Wisdom of Crowds, James Surowiecki's assertion that open, unfettered markets tend to better predict present and future investment outcomes punctured a long-held fallacy. The work reflected bold, fresh thinking in behavioral economics.
By bursting a widely-believed myth, Surowiecki revealed that a free-market-driven collective of people behaves with uncanny intelligence. Crowds spot opportunity, account for risk, and otherwise correctly prophesy results for invested resources.
The thing about the many vs. the few is this. The few may know better, but the many learn faster, and hence, solve for the challenges that cloud the future better. Learning, constantly and inclusively, trumps knowing. Knowing recognizes problems; learning solves problems.
A big, crude crowd of human beings--each of whose intelligence, technical knowledge, talents, and experience may clock in far below the rarer so-called experts, prove time and again to be the smarter predictors of success and actuality. Prior to this pivotal analysis, "the masses" had a reputation for being unruly, and for acting with ignorance, often self-destructively. Crowds conjured images of lemmings hurling themselves off a cliff. Or sheep in the poison meadow, like in the Thomas Hardy classic "Far From the Madding Crowd."
Or, some would say, like residential development and construction companies. History tells us builders will misread or defy or otherwise fail to prepare for a cyclical turn. Then they'll react all at once to preserve themselves. Then they'll go down, and by trying collectively and contagiously to fight it, they'll make it worse, for each other, for themselves, for everybody. The vortex widens, intensifying the gravity, spreading the panic, dragging many more over the cliff.
Happens again and again.
But why the fuss--especially now--about how builders act as a collective in the face of a cyclical pivot downward? To all intents and purposes, order volume, demand pace, and closings, beginning in February have been either on plan or better for so many new home builders in so many markets? By all rights, any builder that had done business in the second half of 2018 has to feel pretty damned good about the first half of 2019, especially given year-end expectations, a government shut-down, and the threat of rising interest rates coming into the New Year.
Of course, we know what happened. The Federal Reserve plunked a big, fat, red-ribbon wrapped gift in the laps of most builders, reversing its monetary policy strategy of raising rates on borrowed capital, and, what's more, a promise to keep rates low--or, lately, even drive the benchmark rate lower--in spite of an economy that's shown signs of heating up inflationary forces.
Further, like baseball pitchers who get timely hits, builders helped their own cause in their efforts to reignite purchase activity during the just-ended Selling Season. They pulled out the stops on aggressive discounting, free upgrades and options, and other promotional inducements to goose pace and offer more housing value for the dollar.
These game-changing tactics, together with the Fed bump and the increasingly important impact of an ever expanding "mix-shift" to lower-priced, entry-level home and community products, worked. They have gone far to turn the psychological tide from anguish to cautious optimism through the current calendar frame.
The fuss, if you want to call it that, traces to two menaces. Uncertainty and volatility. These two forces--which are spiking off the charts--rob momentum, stifle confidence, and can stall markets in their tracks. They'll intensify, especially on the eve of a national election year that can be expected to be highly polarizing, full of the noise of negative advertising, and could likely cause both households, businesses, and investors to downshift into a "wait-and-see" mentality about how it turns out.
That's ahead.
Into that cauldron of uncertainty and volatility, builders are busy. They're doubling-down on their push on volumes, particularly on smaller square-footage homes that generate tighter gross margins on a unit basis, sucking out costs, and managing operations in more spread-out new communities that are harder, logistically, to manage on a day-to-day basis, and competing on price-points and incentives with one another in a race for pace.
Here's where the predicament stands. Instead of a slow and getting-slower pace of orders, many builders are increasing their sold-unit backlogs, which gives them revenue visibility months more into the future than they might have hoped. At the same time, many have been willing to trade margins for pace, so they're operating at razor-thin profit-per-unit models to fuel the motors of demand for their products and communities.
The accepted conditions for operating in the second half of 2019 and beyond? Builders, developers, and residential investment players must navigate a trickier, choppier, thinner, and blurrier line between middling, low-margin, success and ever-more-massive risk of failure, owing at least in part to accelerated build cycles, capital put in place, and intensified pressure on unit volume business flow.
Loathe to look a gift horse in the mouth, builders might be the last ones to dismiss or "dis" the big lift they got from the Fed and from their own success at tactically spurring sales. Still, prospects ahead of working faster, harder, and more cheaply to make less money--and possibly lose lots of money--is hardly the continued recovery market they'd wish for. End-stage recoveries can--as nearly everyone with a cycle or two under his or her belt knows--be harmful to the health of a firm of nearly any size.
The broad backdrop for business remains constructive. It's everything else that makes the back half of 2019 a moment of truth for builders. Constructive "broad backdrop" doesn't guarantee business survival, let alone success. Still, despite the long duration of the current recovery--both on a broad economic basis, on a job-formation trajectory, and on measures of housing activity--it must be said that structural demand for new units of all kinds of housing types, products, and communities, far exceeds supply.
What's more, underpinning that structural demand are solid economic and household drivers:
- The Economy: The U.S.'s longest-ever economic and job expansion continues, with low unemployment and inklings of household income growth.
- The Demographics: Household formation and family formation is still pent-up thanks to lagging Millennial adult formations, yet showing signs of latent growth.
- The Business Climate: Corporate profits have mostly been solid through the 2nd Quarter, with ongoing inducements to capital investment and domestic hiring
- Housing Finance: Lending qualification barriers and costs slowly may be easing for more prospective would-be buyers
So, the deal is this. Profits, by any measure, are going to be harder to deliver. Losses can come like flash floods. And, obsessed as so many stakeholders are with quarter to quarter benchmarks and today's KPIs, the real health or lack of it of home building enterprises can hide for at least several quarters behind the camouflage of year-on-year comps, seasonal shifts, policy adjustments, and other "stories" that mask reality.
Gross and net and per unit margin pressure, and the duress that puts on some versus others among America's leading builders, will be the story of 2019 and 2020 for the Builder 100 and The Next 100 company leaders. This is why our event, from this past May 13 to 15, in Southern California focused on the kinds of skills leaders need to draw on and apply in the face of the stresses and challenges of uncertainty and volatility at a time margin erosion is a fact of home building company operating life.
Here, from the the stage, the hallways, the receptions, and the dinner tables at our recent Housing Leadership Summit, are four big take-aways of the conference every strategic and operational leader should rank among their top action items.
- Constant learning: As technology drives exponential change through the movement of capital, the development and distribution of materials, the management of human skills, and the behavior of households, no manufacturing or marketing model can be static and survive. Enterprises that continue to thrive through the next 24 months and beyond will be ones whose leaders make constant learning--with an aim to "re-skill" every process and discipline and proficiency--a core operating principle. For resilience and strength, HLS strategists note, learning must occur along a matrix, both vertically through the received wisdom of domain experts in the home building field, and horizontally, from outside the domain, where examples and insights on world-class consumer experience, productivity, and operational excellence can feed into home building enterprises' DNA.
- Fanatical customer experience focus: First, HLS executive strategists and leaders found, it's critical to understand who customers are. They're buyers of new homes and prospective residents in new-home communities, of course. But, customer-centricity is more than that. It's recognizing that customers include our team members--associates whose experience directly impacts how and why end-user home-purchasing consumers feel and experience their journey into homeownership. Customer-centricity includes investors, distribution partners, suppliers, vendors, every part of the internal and external-facing organization that impacts both the quality of the homes and communities builders bring to market and the power of the experience of buying and owning to expand a builder's pool and pipeline of new would-be buyers. Any company that's not "journey-mapping" customers, associates, and other key stakeholders in the process, and any firm that's not using Net Promoter Scores as a critical measure among those same stakeholders had best get with it.
- 5G Collaboration: Partnering, because of the complexity, the unique nature of every piece of real estate "dirt," and the specificity of expertise and resource allocation that's essential to developing and building new homes, has always been and will always be a necessary ingredient to home builders' ability to survive and thrive. In today's business and manufacturing environment, though. the very nature and meaning of collaboration is evolving, fast. Whether it's the relationships that will enable a firm to secure local real estate, developing an ecosystem as a tech peer among other data and technology platforms, developers, and brands, constructive ties to local jurisdictional officials and agencies, a trusted source of ready capital, or lines into a fresh stream of knowledge economy data and technology engineers coming straight out of college or graduate school, the need for 5G--or fifth generation--collaboration circles back to the first pillar point, constant learning, re-skilling, and remodeling the model, from both a vertical knowledge standpoint, and a horizontal problem-solving intelligence vantage point.
- Conviction: A balanced blend of vision, belief, courage, and purpose, conviction is the pillar that speaks to an organization's soul or culture, the kind of business driver that gets people to work harder than they plan to, work together more than they believed is possible, and achieve game-changing outcomes they never would have imagined. This factor attracts talent, retains high-achievers and team players, and unleashes both promise, potential, and performance that exceed dollar-for-dollar investment returns. It's where passion and a plan sync up and produce star-alignment among consumers, team members, and business stake-holders because you've done the one thing sustainably successful businesses do to win: You've made the business feel to those stakeholders like it's all about them.
That's how home building's leaders--of big, medium-sized, and smaller enterprises--will shape what's next. They'll tap in to the wisdom of crowds, and they'll recognize, too, where to get off running with the pack.
