1-888-ADMIT-IT or why we need to take the gamble out of building and selling new homes

The Florida legislature legalized gambling on a county by county basis a couple of years back through local referendum and Broward County, home to Fort Lauderdale, was the first to approve the concept.  In my immediate area we now have four casinos, one on the Seminole reservation and three adjoining the racetracks and Jai Lai frontons.  They all offer Vegas-style slots and poker and, at the Seminole casinos, blackjack, baccarat, three card poker, pai gow poker and “let it ride”.  The Hard Rock casino on the Seminole reservation also has a nice hotel and a complete dining, entertainment and shopping complex creating a “destination” experience and they are in the process of building a similar environment at Gulfstream racetrack. 

It’s not yet Vegas and probably never will be but my wife and I often head to one of these casinos for a concert or comedy show or just for dinner and to try our luck. Now I admit that I have a problem with gambling but I have not found it necessary to call the gamblers anonymous “hot line” (1-888-ADMIT-IT) as I freely admit my problem – I haven’t been winning much lately.  Now I do not gamble much but the situation is worse in the homebuilding industry – big gambles have been taken and no one has been winning anything lately. 

It would be foolish to blame the “market” or the “government” for the current challenges facing our industry as it is obvious to me that we did it to ourselves. I first became aware of the industry’s worst gamble several years ago.  The market for new homes on the west coast of Florida had been very strong during the first half of this decade; so strong, in fact, that many of the production builders had decided to limit their sales to 4 or 5 per month.  Their rationale for this action was that by selling at a faster rate than they could build they were leaving money on the table as the sale locked in the price while costs were continuing to rise.  Additionally, as the market appeared to be unlimited, they were missing out on the potential for opportunistic price increases.

So when the market rapidly slowed in the middle of this decade (which occurrence should have been predictable to anyone who had been watching the supply and demand components), these same builders now found that they had no reserve of sales.  I first came upon their creative solution by accident one day while driving through a new community featuring upscale single family homes priced in the mid $300,000s.  They had erected a huge sign at the entrance to the community stating “$100 moves you in”. 

While I appreciated the aggressive marketing approach, their apparent reasoning behind this campaign (“as the ‘natural’ market has apparently been satisfied for the time being, let’s expand the market”), seemed flawed to me; it appeared to me to violate one of the basic tenets of economics as applied to housing as I had been taught that “you cannot create demand, only satisfy the existing demand.”  As a matter of fact, that lesson is taught in the first of the four core courses of the IRM curriculum but apparently this builder knew better.    

My immediate reaction to the sign was that a homeless person who had found a good corner on a good day ought to be able to pick up the necessary $100, buy this house and live there for several months before anyone realized the payments were not being made. Lo and behold, it turns out that my psychic powers were correct as that is darn close to what happened – the start of the “sub-prime” fiasco which still haunts our industry. I do not blame solely this specific builder as all of the larger builders soon had similar programs and even the smaller regional and local builders were screaming for “no money down” financing programs so that they too could “expand” their markets.  gamblingI buy lottery tickets from time to time, especially when the jackpots reach $50,000,000 or more.  I know that the odds against my winning are phenomenal, especially as the state takes a 50% cut off the top.  It is a bad bet from a mathematical standpoint but I buy the tickets anyway as it is the only possibility I will ever have, no matter how remote, of accumulating this amount of cash.  But I do not mortgage my house to buy the tickets, I do not gamble with the money I need for food and I do not quit my job in anticipation of my winning. The builders, however, whether out of desperation, the thrill of the gamble or blindness to the stacked deck they were facing, bet everything they had on this “market expansion” effort and the result was and continues to be disaster. 

Primary housing demand is based on household growth which is determined by population growth which is generated by employment growth.  For those of us who tracked housing production as a ratio of population and employment growth, it was obvious that most markets had been and continued to be overbuilt.  In the face of this overbuilding, creating an artificially induced temporary demand through innovative financing did not solve the underlying fact that we were overbuilding, it merely masked the problem for a short period of time and, in turn, created additional problems of its own that had far-reaching impact and exacerbated the original problem.    

The homebuilding business is, by its very nature, a gamble and it is the responsibility of the sales and marketing professionals to counsel the builders and developers so that whenever possible the odds are in their favor.  We cannot eliminate the gamble but if we are diligent we can substantially reduce the risk of losing. I believe that the sales and marketing professionals in these large homebuilding companies and almost everywhere else failed to provide proper advice to their employers and clients and thereby became willing co-conspirators in this losing gamble.  

So perhaps it is time for all of us to admit that we have a problem with gambling – we have been losing lately and we do not like it.  Let’s solve that problem in the future by starting today to provide the honest and professional counsel that our employers and clients need to hear, whether they like it or not.  Sometimes someone just has to say “no”!

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