With spring training underway I have baseball on my mind, and it’s occurred to me that baseball and housing have two things in common: lots of stats that gauge performance and lots of analysts who try to make sense of the stats. Baseball stats include, among many others, ERAs and batting averages. Housing stats include, among many others, mortgage interest rates and household formations. In both cases, analysts sift through the stats and then predict—team standings in baseball, and housing starts for housing.
I pay attention to analysts’ predictions on both baseball standings and housing starts, and this year I think they got it mostly right on my favorite team, the Pittsburgh Pirates (middle of the pack), and on housing starts (about the same as last year).
But after 45 years around the housing industry, I think housing starts predictions are less interesting than housing trend predictions, many of which I've made myself over the years. Sometimes I’ve missed the boat. For example, during the energy crisis in the 1970s, I predicted most houses would soon be built with solar collectors. I was wrong.
But I got it absolutely right in the early 1980s when in a speech to a group of builders I predicted the housing industry was entering the “dumbbell” (as in barbell) era. That is a period when housing would be strong at the extremes and weak in the middle. I said development would move outward from second-ring suburbs (the middle) to more distant exurban locations and inward to older, first-ring suburbs and urban centers. Bingo! I also predicted that housing activity would be dominated on one end by a new breed of big builders and on the other end by very small builders, and that many mid-sized builders would be squeezed out.
This prediction about big builders proved true, but I underestimated how big the big builders would become. Over the past 25 years, they’ve more than doubled their overall share of market (it now exceeds 50%), and in some major metropolitan markets, like Washington, D.C., big builders control up to 75% of overall activity. I’ll predict now that big builders will become even more dominant in the biggest markets and will enter more secondary markets, and that a mega-merger or two among the top 10 builders will further consolidate the big builder universe.
But back to my predictions about mid-sized and small builders. Both took it on the chin during the Great Recession, and many mid-sized firms in big markets have been purchased by BUILDER 100 companies. I don’t see mid-sized builders making a big comeback. They’re not as financially strong as big builders nor as nimble as small builders. However, I think small home building firms that survived the recession, as well as new firms that have entered the market in the past few years, are in a great position to prosper in smaller markets for sure, but in big markets as well.
If, that is, they do three things and do them well:
- Provide absolutely top-flight customer service (concierge service, if you will) to buyers, many of whom are neighbors. Big builders will be hard-pressed to do the same.
- Work with local community groups, local governments, and local regulatory agencies to establish real rapport that can take a lot of the angst out of the approval process. Here, again, the small builder is an insider; big builders are outsiders and almost automatically meet stiffer resistance.
- Remember that knowing the ground (small builders are usually building in their backyards) is a decisive factor not only in warfare but also in home building as well.
If small builders do those three things—and, of course, build good houses as well—then I predict many small builders can be big winners going forward. As for my Pirates, a .500 season might be a stretch.