Scenario: Barry couldn’t quite put his finger on it, but things didn’t feel right. The last few years had been booming, with eager buyers paying premium dollars for the high-end houses Barry was noted for. But now, even though Barry had plenty of work lined up for the next nine months, things weren’t quite the same. Potential buyers seemed less eager to rush into things and were more likely to question prices and look for values. “Trophy homes,” those overscaled mansions where luxury was the only concern and price was no object, seemed fewer and farther between.
When Barry looked at the economy in general, he felt he had reason for concern. Unemployment was up, and consumer spending in general was down. Government spending was up, and deficits had returned to put pressure on the lending market. And yet, interest rates continued at all-time lows, and the housing market continued to hum along. Despite the uncertainty, there were definite strengths in this economy. Continuing immigration led to increased housing demand and the economy experienced record productivity gains last year. Barry was puzzled about his next step. Should he try to cut back on overhead, anticipating a downturn in the economy? Or should he assume that the economy was basically sound and that things would return to normal as they usually did? If the economy did rebound, would it put even more pressure on the housing market, and if so, did Barry have enough land, capital, and personnel to take advantage of it? Whichever way he went, Barry thought, if he guessed wrong it was bound to affect his operations and profits.
Solution: It’s impossible to consistently out-guess the economy. If you could, you could make a killing in the stock market. The safe and correct course of action is to make sure all your fundamentals are strong, that your company is as competitive and effective as it can be, and that you remain flexible. Whether the economy is strong or weak, companies that have done their preparation, that have eliminated unnecessary costs, and that have developed strong, capable staff, will be better able to survive—and thrive—in any environment.
Uncertainty is often worse than bad news. When buyers are uncertain, they simply refuse to make any decisions, which only makes things worse. When they receive bad news they can always say, “Well, it could have been worse.” After the terrorist attacks of Sept. 11, 2001, many people decided that life is short and they were going to live it as well as they could. After a brief lull, consumer confidence increased and housing starts went up. Then when the stock market went down, the combination of low interest rates and a falling stock market made housing the better choice for disposable dollars. In return, the robust housing market kept the economy from sinking even lower.
A time of uncertainty is a time to rethink operations and make contingency plans. Barry shouldn’t lay off good people that he will need to rely on in good times, but he might want to weed out the marginal producers. If he buys and holds land, he might want to look at his land inventory, and not over-commit for future take-downs. This may not be the time to go heavily in debt for a new development, but he should make arrangements for future land needs. If he wants to build spec houses as well as custom homes, he might want to more carefully manage the number of specs he has in progress at any one time. And he should watch his cash flow diligently and maintain a slightly larger cash reserve than normally required. If he finds himself less busy than he has been, he can use that time to streamline operations or improve financial reporting. And, above all, he should keep an open ear to changes in market demand; he needs to be ready to act if the market gets better or if it gets worse.
Al Trellis, a co-founder of Home Builders Network, has more than 25 years of experience as a custom builder, speaker, and consultant. He can be reached at [email protected].
